Stochastic Modeling of Federal Housing Administration Home Equity Conversion Mortgages with Low-Cost Refinancing |
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Authors: | David T Rodda Ken Lam Andrew Youn |
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Institution: | Abt Associates, Cambridge, MA 02138 or .;Abt Associates, Cambridge, MA 02138 or .;Kellogg Business School, Evanston, IL 60201 or . |
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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. |
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