Reverse Mortgages and Linked Securities: The Complete Guide to Risk, Pricing, and Regulation

196 Pages·2010·2.462 MB·English

by  Vishaal Bhuyan(auth.)

Reverse
Mortgages and
Linked Securities
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Reverse
Mortgages and
Linked Securities
The Complete Guide to Risk,
Pricing, and Regulation
VISHAAL BHUYAN
John Wiley & Sons, Inc.
Copyright#2011byVishaalBhuyan.AllrightsReserved.
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LibraryofCongressCataloging-in-PublicationData:
Bhuyan,VishaalB.,1983-
Reversemortgagesandlinkedsecurities:thecompleteguidetorisk,pricing,andregulation/
VishaalBhuyan.
p.cm.—(Wileyfinanceseries;577)
Includesindex.
ISBN978-0-470-58462-0(hardback)
1. Mortgageloans,Reverse—UnitedStates. I. Title.
HG2040.15.B482011
0
332.722—dc22
2010023295
PrintedintheUnitedStatesofAmerica
10 9 8 7 6 5 4 3 2 1
ToFIFA
1999–2008
Contents
Preface xi
Acknowledgments xvii
ListofContributors xix
PARTONE
ReverseMortgageBasics 1
CHAPTER1
ReverseMortgagePrimer 3
LoanDisbursements 4
OverviewofLenderChallenges 6
Summary 6
CHAPTER2
TheHistoryofReverseMortgages:AnInsider’sView 8
FormativeYears 8
PrivatePrograms 9
FirstLifetimeReverseMortgages 10
FannieMaeStakesaClaimtotheMarketplace 12
RootsoftheSecuritizationofReverseMortgages 13
Summary 15
Notes 16
CHAPTER3
HECMExplained:ReverseMortgagesOriginatedviathe
HomeEquityConversionMortgage(HECM)Program 17
LegislativeHistoryandProgramFundamentals 18
DisbursingFundsandCalculating
LoansandInterest 19
vii
viii CONTENTS
ChangestotheProgramFollowingthe2008Act 21
Consumer-FocusedElementsoftheProgram 24
Summary 26
Notes 28
PARTTWO
UnderwritingandRiskAnalysis 33
CHAPTER4
UnderwritingReverseMortgages 35
UnderwritingLifeExpectancy 36
LifeSettlementversusReverseMortgageUnderwriting 37
SimplicityoftheCurrentReverseMortgage
UnderwritingProcess 37
WhyDoesUnderwritingMatter? 38
ProposedElementsofReverseMortgageUnderwriting 38
Summary 42
CHAPTER5
RiskMitigationfromExistingandProposedFinancialProducts 43
ReverseMortgageRisks 46
AgencyversusNonconformingLoans 48
Summary 53
Notes 54
CHAPTER6
LongevityRiskandFairValueAccounting 55
LongevityCostCalculatorTMasaLoanUnderwriting
andPricingTool 61
ReverseMortgageLoanPricingUsingtheLongevity
CostCalculator 74
ExistingAccountingFramework 75
SuggestedGAAP-CompliantMethodologytoStandardize
LifeSettlementUnderwriting 77
Summary 78
Notes 79
Contents ix
CHAPTER7
RiskMitigation:AvailableHedgesandProductsin
DevelopmentforRiskTransfer 81
HedgingCrossoverComponentsintheCapitalMarkets 82
InsuranceSolutions 86
Summary 90
Note 90
CHAPTER8
CriteriaforRatingU.K.ReverseMortgage–BackedSecurities 91
OverviewofReverse(EquityRelease)Mortgages 91
ReverseMortgage-BackedSecuritization 92
MortalityAssumptions 93
PrepaymentAssumptions 94
HousePriceIncreaseAssumptions 95
CostsandSalePeriod 97
Summary 97
PARTTHREE
TaxTreatment 99
CHAPTER9
U.S.FederalIncomeTaxAspectsofReverseMortgages 101
WhatIsaReverseMortgage? 102
DeductibilityofInterestPaymentsonReverseMortgages 102
SecuritizationofReverseMortgageLoansviaREMICStructures 103
PracticalObservationsRegarding
InvestmentReverseMortgageREMICSecurities 105
Summary 106
Notes 107
PARTFOUR
ReverseMortgagesinContext 109
CHAPTER10
UnlockingHousingEquityinJapan 111
ImplementationintheJapaneseContext 112
FeasibilityofReverseMortgagesinJapan 117
x CONTENTS
Summary 121
Notes 124
CHAPTER11
TheSecondaryMarketinHomeEquityConversionMortgages 127
TheReverseMortgagetoLiquidateHomeEquity 127
HECM:AFinancialInnovation 130
CashFlows,Risk,andUncertainty 131
TheSecondaryMarketforHECM 132
HECMSecuritization 134
LongevityRiskEmbeddedinHECM 137
TheConstraintsoftheUnderlyingAsset 140
ConcludingRemarks 145
Summary 146
APPENDIXA
HousingWealthAmongtheElderly 149
WealthinHousing 149
Owner-OccupancyRates 152
HowRiskyIsHousingWealth? 153
DotheElderlyDecumulateTheirHousingWealth? 155
Notes 159
APPENDIXB
ReverseMortgageAnalytics 161
DeterminingthePayoutValues:PracticalConsiderations 162
ComputingPayoutValues:AnExample 163
Notes 165
Glossary 167
AbouttheAuthor 171
AbouttheContributors 173
Index 181
Preface
O
ver the past few years, seniors and soon-to-be retirees (Baby Boomers)
have lost tremendous value in their retirement plans and especially in
their home values. In addition to the depreciation of assets held by this
group of Americans, unprecedented amounts of leverage used to finance
their daily living, automobile purchases, and children’s educations, as well
as to purchase primary and even secondary residences in many cases, have
leftalargenumberofolderAmericansonthebrinkoffinancialruin.
The Baby Boomers (born between 1946 and 1960) currently comprise
26percentofthepopulationoftheUnitedStatesorroughly78millionpeo-
ple.Encompassingtwocohorts(peoplebornbetween1946and1955make
upthefirstcohortandthesecondcohort,aka‘‘GenerationJones,’’ismade
up of people born from 1956 to 1964), the Boomer generation is one of
the largest and wealthiest demographics in U.S. history. According to a
studyconductedbyMcKinsey&Company,thewealthoftheBabyBoomers
canbeattributedtothreemajorfactors:
1. Size
2. Socialchange
3. Education
Clearly,thesheersizeoftheBabyBoomerscohortallowedthemtogen-
erate more income on a collective basis, being that this generation is some
50percent larger than thepreviousgeneration. Baby Boomershaveearned
anestimated $2trillion more (roughly $3.7trillion) thanthepreviousgen-
eration had at the same age. Moreover, the Baby Boomers were the first
generation to experience a much higher number of female workers, which
also meant women having children at a later age and staying in the work-
place for longer periods of time. Finally, the Boomer generation was one
of the most educated generations to that point, which allowed them to
capitalizeonmanyeconomicandtechnologicalshifts.
DespitetheawesomeearningpoweroftheBabyBoomers,thisgroupof
Americansisgrosslyundersaved.Thisfinancialunpreparednesswasmerely
amplified by the global credit crisis; according to the Center for Economic
xi