Stochastic Modeling of Federal Housing Administration Home Equity Conversion Mortgages with Low‐Cost Refinancing

David T. Rodda, Ken Lam and Andrew Youn

Real Estate Economics, 2004, vol. 32, issue 4, 589-617

Abstract: Federal Housing Administration‐insured reverse mortgages, known as Home Equity Conversion Mortgages (HECMs), did not originally have a provision for low‐cost refinancing. If a borrower's house value increased faster than expected, the borrower could not tap that additional equity without terminating the first loan and originating a new HECM loan with full closing costs. We test several low‐cost refinancing options using a stochastic simulation model that allows interest rates and house prices to vary in historically accurate patterns. Low‐cost refinancing decreases the net value of the fund by 54% to $98.5 million, but it remains positive in 80% of the trials.

Date: 2004
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