Reverse Mortgages and Borrower Maintenance Risk

This paper develops a theoretical model of the problem of maintenance risk in reverse mortgages (RMs) and home equity conversion instruments generally. By maintenance risk, we refer to the incentive homeowners will have to reduce maintenance expenditures as their equity in the house falls during the term of the RM. The underlying reason for this tendency is the limited liability feature of RMs, given that a borrower's obligation to the lender at. maturity is limited to the value of the house.
The results of the model show that lenders will respond to this problem either by limiting the amount of RM loans to guarantee that maintenance risk is not a threat, or by charging an interest rate premium to cover the expected cost of default. Unfortunately, there do not exist data to test the importance of maintenance risk as a possible limitation on the extent of the RM market.     

Housing Price Dynamics,Mortgage Credit and Reverse Mortgage Demand: Theory and Empirical Evidence

This article presents some theoretical and empirical approaches for identifying interactions among fundamental economic variables that determine housing prices. Using home equity conversion mortgage (HECM) loan‐level data, this study quantifies the major risks of reverse mortgages and shows that higher housing prices induce higher demand for reverse mortgages among elderly homeowners. Senior citizens rationally hold pessimistic expectations about future housing price appreciation and lock in their home‐equity gains by obtaining reverse mortgages, which in turn led to the substantial HECM growth prior to the financial crisis of 2008. A novel simulation also forecasts HECM loans under various economic scenarios. From a mortgage credit perspective, these findings generate several policy implications for the implementation of “HECM 3.0.”     

Potential Beneficiaries from Reverse Mortgage Products for Elderly Homeowners: An Analysis of American Housing Survey Data

A variety of reverse mortgage loan programs have been available to elderly households for over a decade. The number of unrestricted reverse mortgage loans issued by the private sector has been quite small. About 12,000 loans have been issued through mid-1992. Some researchers take this to mean that the size of the potential market for reverse mortgages is also quite small. Other researchers claim that current low levels of activity reflect supply and demand problems, but that the potential market is in fact quite large. This paper uses American Housing Survey (AHS) data to estimate the potential size of the market for unrestricted reverse mortgages. The 1989 national AHS shows that there are over twelve million elderly homeowners (age 62 and over) who own their homes free and clear. Depending on their income, age and the level of home equity, the group of households most likely to benefit from reverse annuity mortgages is considerably smaller. As one approach to defining a lower bound of the estimate of potential beneficiaries from reverse mortgages, we count the number of homeowners in a prime group consisting of the older elderly, aged 70 or above, with an annual income of $30,000 or less, with home equity between $100,000 and $200,000, who have lived in their homes for over ten years. We estimate that there are about 800,000 elderly households in this prime group. For such households, reverse mortgage payments could represent a substantial percentage increase in income; other definitions of target groups can also be explored using the tables provided. The paper uses the 1985 through 1988 AHS Standard Metropolitan Statistical Area (SMSA) surveys to identify areas that have a large number of elderly homeowners in the prime target group, and in which these homeowners represent a large fraction of the elderly homeowner population. These locations are likely targets for introduction of reverse mortgage products because any campaign can be targeted towards a high concentration of likely eligible beneficiaries.     

Appraisal, Agency and Atypicality: Evidence from Manufactured Homes

The appraisal of the "market value" of homes serving as the collateral for mortgages is a fundamental part of the underwriting process. If a loan should default, however, it is not the retail market value that the lender obtains, but rather the "recovery value." In this research, we show how recovery values differ from market values at origination and explore the reasons for the differences. Using a large sample of chattel mortgages on manufactured homes, we explore the relationship among the selling prices, the book values, and the fitted values from simple hedonic models with spatial autocorrelation. We then address the differences between selling prices at origination and recoveries from repossessed homes. We find that the spread between them varies systematically with home characteristics and especially with "atypicality," that is, with measures of how unusual a home is. Selling prices both at origination and recovery affect borrower defaults.     

An Insurance Approach to Risk Analysis of Debt Home Equity Conversion Programs

The use of home equity conversion debt creates a compounding obligation against the home that makes collateral deficiency a potentially dominant risk. Using an insurance methodology, an examination of this risk and its impact upon the potential for home equity conversion is conducted. The paper includes a consideration of how deficiency risk and maximum potential benefits are affected by the interaction of household characteristics with demographic and economic factors.     

An Analysis of Home Equity Conversion in the RAM Program

Home equity conversion by elderly homeowners is described and analyzed. The transactions were completed under the California RAM Program. One hundred twenty-six of 345 applicants elected to enter into reverse mortgages or sale-leasebacks. Data from interviews conducted as part of the application/counseling process are analyzed to discern the most important variables in the equity conversion decision.     

Do Homeowners Mark to Market? A Comparison of Self‐Reported and Estimated Market Home Values During the Housing Boom and Bust

This article examines homeowners’ self‐reported values in the American Housing Survey and the Health and Retirement Study from the start of the recent housing price run‐ups through recent price declines. We compare ZIP‐Code‐level market‐based estimates of housing prices to those derived from homeowners’ self‐reported values. We show that there are systematic differences which vary with market conditions and the amount of equity owners hold in their homes. When prices have fallen, homeowners systematically state that their homes are worth more than market estimates suggest, and homeowners with little or no equity in their homes state values above the market estimates to a greater degree. Over time, homeowners appear to adjust their assessments to be more in line with past market trends, but only slowly. Our results suggest that underwater borrowers are likely to understate their losses and either may not be aware that their mortgages are underwater or underestimate the degree to which they are.     

Home Equity Conversion Instruments with Fixed Term to Maturity: Alternatives to End of Term Pay-Off

Standard reverse annuity mortgages obligate the lender to take on the risk that an elderly homeowner will desire to remain in a residence after the RAM has reached maturity. In this case, the best the lender can hope for is that the property will have appreciated sufficiently that the loan can be carried at interest only. There is a possibility for lender loss but not gain over contracted return.
Alternatives to the standard RAM are explored in this paper with most attention devoted to shared appreciation and shared equity RAMs. These alternative instruments appear to solve the problem of maturity risk.     

REIT Stock Price Volatility and the Effects of Leverage

This article sheds light on several puzzling empirical observations. We examine the volatility implications of equity Real Estate Investment Trust (REIT) stock returns over the sample period from January 1985 through October 2012. We find a negative “leverage effect” in the pre‐ and post‐Greenspan era, but not during the Greenspan era (circa 1994–2006). We argue that the positive elasticity of variance with respect to the value of equity during the Greenspan era can be explained by a decline in the spread between the yield on commercial mortgages and 10‐year Treasuries, which triggered a wealth transfer from REIT equity holders to REIT debt holders. We also argue that the declining commercial‐mortgage‐10‐year‐Treasury yield spread during the Greenspan era allowed REITs to take on far more risk than most people realized. We then document that average REIT stock return volatility increased significantly in the 2007–2010 period in the midst of a historic decline in REIT stock prices. The results have significant implications for the good deal of interest and debate in the media over the status of REITs and whether equity REITs have become excessively risky relative to the returns they generate.     

Are Investors the Bad Guys? Tenure and Neighborhood Stability in Chelsea,Massachusetts

In this article, we examine the role of investors and occupant‐owners in an urban context during the recent housing crisis. We focus on Chelsea, Massachusetts, because it is a dense city, dominated by multifamily housing structures with high rates of foreclosure for which we have particularly good data. We distinguish between occupant‐owners and investors using local data, and we find that many investors are misclassified as occupant‐owners in the Home Mortgage Disclosure Act data. Then, employing a competing risks framework to study ownerships during the period 1998 through mid‐2010, we find that local investors, who tend to invest more in relation to purchase prices and sell more quickly, experienced approximately 1.8 times the mortgage foreclosure risk of occupant‐owners, conditional on financing. Nonlocal investors have no statistically significant difference in foreclosure risk from occupant‐owners. Nonetheless, those owners with subprime purchase mortgages (most of whom are occupant‐owners) faced the highest foreclosure risk when house prices fell.     

Lender Forbearance: Evidence from Mortgage Delinquency Patterns

The length of time that residential mortgages remain in delinquency prior to foreclosure is examined using an Accelerated Failure Time (AFT) model and a database of 207 foreclosed conventional and Veteran's Administration (VA) mortgages. The results suggest that the primary factors influencing the timing of the lender's foreclosure decision are the borrower's equity position and the erosion of that position with continuing delinquency. Borrower bankruptcy and VA guarantees also lengthen the delinquency period. Delinquency periods for fixed rate mortgages (FRM) decrease when the market interest rate increases.     

Tracing the source of liquidity for distressed housing markets

We show that profit-seeking institutional investors provide valuable liquidity and spur the recovery of distressed housing markets. Using a quasi-natural experiment wherein investors purchased prepackaged distressed home portfolios from government-sponsored enterprises, we find that transaction prices of properties located within 0.25 miles of bulk-sale properties increased by 1.4% more than homes located farther away. This positive price spillover effect helped reverse the discounts at which such properties were being sold prior to the bulk-sale event. The price spillover effect due to the bulk-sale event is greater for foreclosed homes (4.1%), homes similar to the bulk-sale homes (2.5%), and homes in highly distressed neighborhoods (7.0%). Our results highlight asset disposition through pooling and institutional participation as a potential market-driven channel for the recovery of distressed housing markets.     

The Cap Rate Spread: A New Metric for Commercial Underwriting

This study introduces the cap rate spread as a novel metric for underwriting commercial mortgages. Cap rate spread is the difference between the cap rate and the fixed coupon rate. The spread predicts performance risk in a sample of 24,951 commercial mortgage‐backed securities loans during 1993–2011. We demonstrate that the cap rate spread includes crucial information about performance risk. The results arise from the role of the cap rate spread in generating positive or negative leveraged returns to equity in situations where additional equity is required. Incorporating simplistic cap rate spread requirements in commercial underwriting is expected to reduce loan performance risk.     

Refinancing Trends among Lower Income and Minority Homeowners during the Housing Boom and Bust

This article examines trends in mortgage refinancing activity during the housing boom and bust, with a focus on homeowners in lower income and minority market (LIMM) areas. Unlike any other period in recent history, during the boom LIMM homeowners refinanced their mortgages more frequently than non‐LIMM homeowners. This occurred primarily among borrowers for whom the refinance option was not in‐the‐money, and it is likely attributable to the concurrent growth of subprime, cash‐out refinancing. Following the 2007 mortgage market collapse, however, LIMM homeowners were less likely to refinance. This can be explained in part by systematic differences in home equity levels across borrowers.     

Why Mortgage Borrowers Persevere: An Explanation of First and Second Lien Performance Mismatch

Borrowers with a pair of mortgages collateralized by the same property sometimes continue to make payments on one while defaulting on the other. We articulate a framework for understanding this performance mismatch that emphasizes two types of borrowers: those with stable equity positions who perceive they are facing moderate or temporary liquidity shocks, and those facing severe financial stress in combination with negative equity. The former have an incentive to enter mismatch and subsequently cure, while the latter would default on both contracts. Our empirical analysis using newly available, national samples of matched first‐ and second‐lien mortgages supports this view.     

A Dynamic Double-Trigger Model of Multifamily Mortgage Default

This study advances the commercial mortgage literature by providing theory and methods for incorporating both equity and cash-flow considerations in default models. We use local market conditions to compute a (joint) probability that default is in-the-money, based on both equity and cash-flow considerations. Statistical analysis is performed using data on multifamily mortgages originated in the 1980s and early 1990s. Simulations based on statistical modeling show advantages of the probabilistic double-trigger approach over other measures of equity and cash flow.     

中国基金经理激励机制的现状与发展

基金经理的道德风险是一种潜在的威胁投资者利益的风险，通过法律法规、治理结构以及监管可以约束基金经理。但通过激励机制来激励基金经理努力工作并防范基金经理的道德风险却是最可行的方法。文章对中国基金经理激励机制的现状与发展进行了分析，期望为基金投资者利益的保护，乃至为中国基金业的发展提供一个新的视角。     

The Performance of Low-Income and Minority Mortgages

This article analyzes the performance of low-income and minority mortgages (LIMMs) from a large sample of fixed-rate conventional conforming mortgages. We find that low-income borrowers are less likely to prepay when it is optimal, whereas black and Hispanic borrowers prepay more slowly than other borrowers, regardless of the option's value. After controlling for equity, credit history and some other variables, LIMMs default slightly more frequently and have about the same loss severity as other loans. Our results suggest that, for most yield curve situations, differences in LIMM prepayment behavior have little effect on pricing.     

Bankruptcy Exemption,Home Equity and Mortgage Credit

This article examines the impact of state bankruptcy homestead exemptions on mortgage application outcomes. The empirical analysis controls for endogeneity problems by focusing on 55 urban areas that cross state borders using the Home Mortgage Disclosure Act files from 2001 to 2008. The results indicate that holding the loan‐to‐value ratio constant, a more generous homestead exemption encourages borrowers to buy more housing and take out larger mortgages. However, holding house value constant, a more generous homestead exemption discourages mortgage borrowing and results in more home equity. Moreover, benefits of the homestead exemption outweigh the costs of it to mortgage lenders.     

Real Estate Investment Acquisition Rules for Life Insurance Companies and Pension Funds: A Survey

Real estate comprises the major wealth of the United States as well as the world. Life insurance companies and pension funds are rapidly becoming major investors in real estate due to their large portfolios and annual cash inflows. Aggregate inflows of life insurance companies and pension funds are estimated to be about 150 billion dollars per year. Increasing amounts of these funds are believed to be going into real estate investments. This study surveys life insurance companies and pension managers on all facets of their real estate investments. The survey covers real estate portfolio size and type, portfolio composition, investment by property type, international investments, before-tax analysis, after-tax analysis, diversification strategies, computer usage, holding period assumptions and criteria for obtaining mortgages, equity positions and construction loans. The results of this study are then compared and contrasted with previous studies.