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Title: Breakeven Determination of Loan Limits for Reverse Mortgages under Information Asymmetry
Authors: Pu, M.
Fan, G.-Z.
Deng, Y. 
Keywords: Heterogeneous Beliefs
Information Asymmetry
Loan Limits
Reverse Mortgages
Issue Date: Apr-2014
Citation: Pu, M., Fan, G.-Z., Deng, Y. (2014-04). Breakeven Determination of Loan Limits for Reverse Mortgages under Information Asymmetry. Journal of Real Estate Finance and Economics 48 (3) : 492-521. ScholarBank@NUS Repository.
Abstract: Since the loan limit of a reverse mortgage is a major concern for the borrower as well as the lender, this paper attempts to develop an option-based model to evaluate the loan limits of reverse mortgages. Our model can identify several crucial determinants for reverse mortgage loan limits, such as initial housing price, expected housing price growth, house price volatility, mortality distribution, and interest rates. We also pay special attention to the important implication of mortgage lenders' informational advantage over reverse mortgage borrowers concerning housing market risk. In reverse mortgage markets, the elderly borrowers typically hold far less, relative to the lenders, or no information about the lenders' underlying mortgage pools. Such information asymmetry leads these two categories of market participants to generate different perspectives on the risk of the collateralized properties, which can be identified to be important in determining the maximum loan amounts of reverse mortgages. We further find that the maximum loan amount of a reverse mortgage decreases in the correlation between the returns on the pooled underlying housing properties but increases with the number of the pooled mortgages. © 2013 Springer Science+Business Media New York.
Source Title: Journal of Real Estate Finance and Economics
ISSN: 08955638
DOI: 10.1007/s11146-013-9415-2
Appears in Collections:Staff Publications

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