Securitization of the Longevity Risk: Case Study of the Reverse Mortgage

Abstract

This paper applies the Monte Carlo simulation to analyze the variables that influence the benefits of participating in the Home Equity Conversion Mortgage (HECM) program--a reverse mortgage program insured by the Federal Housing Administration (FHA). The reverse mortgage is an interest-bearing, non-concourse loan that allows elderly homeowners to monetize their residential properties while residing in their homes. Here we simulate the longevity risk using the Lee & Carter (1992) model, and model the interest rate and housing price using a regime-switching model and the nonparametric trend filtering approach. The simulation examines how the age at the participation, the property value, the property tax rate, the interest rates, and the payment type influence the benefits of the participants.