A Proposal to Calculate the Regulatory Capital Requirements for Reverse Mortgages

Iván de la Fuente (), Eliseo Navarro and Gregorio Serna
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Iván de la Fuente: University of Alcalá
Eliseo Navarro: University of Alcalá
Gregorio Serna: University of Alcalá

A chapter in Mathematical and Statistical Methods for Actuarial Sciences and Finance, 2022, pp 181-187 from Springer

Abstract: Abstract In this paper, we propose a new method for estimating the regulatory capital requirements for a portfolio of income stream reverse mortgages owned by a financial institution, according to Basel II and III. The method considers house price risk, mortality risk and interest rate risk and regulatory capital requirements need to be computed using a Monte Carlo simulation procedure. Several scenarios for the reverse mortgage specifications are considered, including fixed or variable mortgage rates and different income stream schemes (with the lump sum as a particular case). The results for the U.K. show that the reverse mortgage provider faces higher risk in the lump-sum case, for relatively young borrowers and for the female population. Furthermore, the lender’s risk grows with the percentage of the loan amount that the borrower receives on the initial date, with the lump sum (100% of the loan amount on the initial date) being the riskiest case. The lender’s risk is also higher with fixed mortgage roll-up rates than with floating rates.

Keywords: Reverse mortgages; Option pricing; Mortality modeling; House price modeling; Interest rate risk; Regulatory capital requirements; G21; G22; J14; R3 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-030-99638-3_30

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DOI: 10.1007/978-3-030-99638-3_30

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