Abstract
In this paper, we perform a sensitivity analysis to show how the value of the no-negative-equity guarantee (NNEG) embedded in reverse mortgage contracts varies with the value of the mortgage roll-up rate, the rental yield rate, as well as the gender and the age of the borrower. The analysis is performed for four European countries: France, Germany, Spain and the United Kingdom. The results show that the NNEG tends to be higher, and consequently the reverse mortgage provider faces higher risks, for higher roll-up rates, for higher rental yield rates, for the female population, and for relatively young borrowers. Moreover, the country with the highest estimated value of the NNEG is Spain, the country most affected by the 2008 financial crisis.
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Notes
- 1.
Traditionally is has been assumed an inverse relationship between interest rates and home prices. However, during the last years there have been many papers putting into question the existence of a clear relationship between both variables (see for example McQuinn and O’Reilly 2008, and Wong et al. 2003, among others). For this reason, we have decided to assume independence between interest rates and home prices. This is also the approach followed by Li et al. (2010).
- 2.
The estimated values of the NNEG are close to zero for roll-up rates below 3%.
- 3.
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Acknowledgements
We acknowledge the financial support of Junta de Castilla-La Mancha grant PEII-2014-019-P and of the Ministerio de Educación grant ECO2014-59664-P.
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de la Fuente, I., Navarro, E., Serna, G. (2018). Estimating the No-Negative-Equity Guarantee in Reverse Mortgages: International Sensitivity Analysis. In: Mili, M., Samaniego Medina, R., di Pietro, F. (eds) New Methods in Fixed Income Modeling. Contributions to Management Science. Springer, Cham. https://doi.org/10.1007/978-3-319-95285-7_13
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