The FHA Home Equity Conversion Mortgage Insurance Demonstration: A Model to Calculate Borrower Payments and Insurance Risk
This paper is a technical explanation of the payments model developed for the Federal Housing Administration's Home Equity Conversion Mortgage Insurance Demonstration. The model is presented in sufficient detail to allow actuaries, economists, and other specialists to replicate and evaluate the payments allowed under the demonstration. Home equity conversion mortgages, or reverse mortgages, allow elderly homeowners to borrow on the equity of their homes without having to pay back the loan and interest until the house is sold. The paper reports that reverse mortgages to date have not enjoyed wide market acceptance as vehicles for home equity conversion by elderly households due to the inherent risks in these loans. The borrower's primary risk is outliving his or her assets (home equity being the primary asset for many potential borrowers); the lender's primary risk is earning less than the market rate of return on the investment. The payments model described in this paper controls the risk of each mortgage by producing a factor table that limits cash advances (payments) to borrowers. After presenting the underlying assumptions and the mathematical equations of the payments model, the paper describes how to determine the amount of cash advance payments under the model. Actuarial assumptions and parameter sensitivity under the model are also discussed. Appended supplementary information and 24 references.
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