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Stochastic Modeling of Federal Housing Administration Home Equity Conversion Mortgages with Low‐Cost Refinancing
Author(s) -
Rodda David T.,
Lam Ken,
Youn Andrew
Publication year - 2004
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/j.1080-8620.2004.00104.x
Subject(s) - home equity , loan , equity (law) , economics , closing (real estate) , value (mathematics) , finance , monetary economics , actuarial science , business , machine learning , political science , computer science , law
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.