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Reverse Mortgages and Linked Securities: The Complete Guide to Risk, Pricing, and Regulation



Reverse Mortgages and Linked Securities: The Complete Guide to Risk, Pricing, and Regulation

Vishaal B. Bhuyan

ISBN: 978-0-470-92151-7 October 2010 208 Pages

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An institutional investor's guide to the burgeoning field of reverse mortgage securitization

Reverse Mortgages and Linked Securities is a contributed title comprising many of the leading minds in the Home Equity Conversion Mortgages (HECM) industry, including reverse mortgage lenders, institutional investors, underwriters, attorneys, and regulators.

This book begins with a brief history of reverse mortgages, and quickly moves on to discuss how the industry has evolved-detailing the players in these markets as well as the process. It discusses the securitization of reverse mortgages and other linked securities and includes coverage of pricing techniques and risk mitigation. This reliable resource also takes the time to cover the current regulatory environment of the HECM market, which is constantly changing due to the current state of the real estate market.

  • Highlights specific strategies that will allow institutional investors to benefit from the resurgence of reverse mortgages and linked securities
  • One of the only guides to reverse mortgages and linked securities targeted towards institutional investors interested in securitized products

If you want to make the most of reverse mortgages and linked securities, take the time to read this book.



List of Contributors.

Part One Reverse Mortgage Basics.

Chapter 1 Reverse Mortgage Primer.

Loan Disbursements.

Overview of Lender Challenges.


Chapter 2 The History of Reverse Mortgages – an Insider's View.

Formative Years.

Private Programs.

First Lifetime Reverse Mortgages.

Fannie Mae Stakes a Claim to the Marketplace.

Roots of the Securitization of Reverse Mortgages.


Chapter 3 HECM Explained Reverse Mortgages Originated through the Home Equity Conversion Mortgage (HECM) Program.

Legislative History and Program Fundamentals.

Disbursing Funds and Calculating Loans and Interest.

Changes to the Program Following the 2008 Act.

Consumer Focused Elements of the Program.


Part Two Underwriting and Risk Analysis.

Chapter 4 Underwriting Reverse Mortgages.

Underwriting Life Expectancy.

Life Settlement versus Reverse Mortgage Underwriting.

Simplicity of the Current Reverse Mortgage Underwriting Process.

Why Does Underwriting Matter?

Proposed Elements of Reverse Mortgage Underwriting.


Chapter 5 Risk Mitigation from Existing and Proposed Financial Products.

Reverse Mortgage Risks.

Agency versus Non-Conforming Loans.


Chapter 6 Longevity Risk and Fair Value Accounting.

Longevity Cost Calculator™ as a Loan Underwriting and Pricing Tool.

Reverse Mortgage Loan Pricing Using the Longevity Cost Calculator

Existing Accounting Framework.

Suggested GAAP Compliant Methodology to Standardize Life Settlement Underwriting.


Chapter 7 Risk Mitigation Available Hedges & Products in Development for Risk Transfer.

Hedging Crossover Components in the Capital Markets.

Insurance Solutions.


Chapter 8 Criteria for Rating U.K. Reverse Mortgage-Backed Securities.

Overview of Reverse (Equity Release) Mortgages.

Reverse Mortgage-Backed Securitization.

Mortality Assumptions.

Prepayment Assumptions.

House Price Increase Assumptions.

HPI in Year 1.

HPI in Years 5–15.

HPI in Years 16 to Legal Final Maturity Date.

Costs and Sale Period.


Part Three Tax Treatment.

Chapter 9 United States Federal Income Tax Aspects of Reverse Mortgages.

What is a Reverse Mortgage?

Deductibility of Interest Payments on Reverse Mortgages.

Securitization of Reverse Mortgage Loans Through REMIC Structures.

Practical Observations Regarding Investment Reverse Mortgage REMIC Securities.


Part Four Reverse Mortgages in Context.

Chapter 10 Unlocking Housing Equity in Japan.

Implementation in the Japanese Context.

Feasibility of Reverse Mortgages in Japan.


Chapter 11 The Secondary Market in Home Equity Conversion Mortgages.

The Reverse Mortgage to Liquidate Home Equity.

HECM: A Financial Innovation.

Cash Flows, Risk, and Uncertainty.

The Secondary Market for HECM.

HECM Securitization.

Longevity Risk Embedded in HECM.

The Constraints of the Underlying Asset.

Concluding Remarks.


Appendix A Housing Wealth Among the Elderly.

Wealth in Housing.

Owner-Occupancy Rates.

How Risky is Housing Wealth?

Do the Elderly Decumulate their Housing Wealth?

Appendix B: Reverse Mortgage Analytics.

Determining the Payout Values: Practical Considerations.

Computing Payout Values: An Example.



About the Author.

About the Contributors.