Reverse Mortgages: Exploring the Impact of Risk Factors by Source

Emilia Di Lorenzo (), Giulia Magni () and Marilena Sibillo ()
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Emilia Di Lorenzo: University of Naples Federico II, Department of Economic and Statistical Sciences, via Cintia, Complesso Monte S. Angelo
Giulia Magni: Sapienza University of Rome, Department of Statistical Sciences, Piazzale Aldo Moro 5
Marilena Sibillo: University of Salerno, Department of Economics and Statistics, via Giovanni Paolo II 132

A chapter in New Perspectives in Mathematical and Statistical Methods for Actuarial Sciences and Finance, 2025, pp 144-156 from Springer

Abstract: Abstract In recent years, reverse mortgages have gained attention as suitable financial instruments for individuals of retirement age, particularly those classified as “house-rich but cash-poor.” Despite growing interest in countries such as the US, the UK, and Australia, the Italian market remains underdeveloped in this area. From a lender’s perspective, these contracts are perceived as complex, mainly due to the management of various risk components: longevity risk, financial risk, and house price risk. Our goal is to provide lenders with insights into the impact of each risk factor through a time-dependent profit/loss function. This approach aids in identifying the most critical sources of risk, enabling lenders to take appropriate measures to mitigate potential financial threats. We conduct Monte Carlo simulations of the chosen stochastic risk models and apply a single-component VaR assessment procedure. Our findings indicate that house price risk is the most significant risk factor of a Reverse Mortgage portfolio. Moreover, the lender can control the financial risk through the analysis of the risk premium values. The results also highlight that, beyond a certain time horizon, the lender’s exposure stabilizes, with profitability emerging in the long run.

Keywords: Reverse Mortgages; longevity risk; financial risk; house-price risk; single component-VaR (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/978-3-032-05551-4_13

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