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Abstract
Reverse mortgages expose investors to the uncertain lifetimes of the borrowers. If a borrower lives longer than originally expected, the value of the reverse mortgage will have more time to approach and eventually surpass the value of the mortgaged property. A reverse mortgage is designed to negatively amortize; the mortgage value grows as interest accrues. Additionally, the home value may rise and fall over time. The time after mortgage origination at which the value of the reverse mortgage loan and the value of the mortgaged property are equal is called the cross-over point. In this article, the authors compute this time t*, relative to changes in rate of interest on the mortgage, inflation, and the value of the amount owed relative to the property value. They map the cross-over times with respect to these variables. Their conclusions offer important insights to those responsible for managing portfolios of reverse mortgages and risks derived from these mortgages.
- © 2013 Pageant Media Ltd
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US and Overseas: +1 646-931-9045
UK: 0207 139 1600