Is the Home Equity Conversion Mortgage in the United States Sustainable? Evidence from Pricing Mortgage Insurance Premiums and Non-Recourse Provisions Using the Conditional Esscher Transform

49 Pages Posted: 24 Apr 2014

See all articles by Hua Chen

Hua Chen

University of Hawaiʻi at Mānoa

Samuel H. Cox

University of Manitoba - Asper School of Business

Shaun Wang

Georgia State University's Robinson College of Business

Date Written: December 20, 2009

Abstract

The purpose of this paper is to build a modeling and pricing framework to investigate the sustainability of the Home Equity Conversion Mortgage (HECM) program in the United States under realistic economic scenarios, i.e., whether the premium payments cover the fair premiums for the inherent risks in the HECM program. We note that earlier HECM models use static mortality tables, neglecting the dynamics of mortality rates and extreme mortality jumps. The earlier models also assume housing prices follow a geometric Brownian motion, which contradicts the fact that housing prices exhibit strong autocorrelation and varying volatility over time. To solve these problems, we propose a generalized Lee-Carter model with asymmetric jump effects to fit the mortality data, and model the house price index via an ARIMA-GARCH process. We then employ the conditional Esscher transform to price the non-recourse provision of reverse mortgages and compare it with the calculated mortgage insurance premiums. The HECM program turns out to be sustainable based on our model setup and parameter settings.

Keywords: Home Equity Conversion Mortgage (HECM); Non-Recourse Provision; Mortality Modeling; Conditional Esscher Transform

JEL Classification: C22, G13, G22

Suggested Citation

Chen, Hua and Cox, Samuel H. and Wang, Shaun S., Is the Home Equity Conversion Mortgage in the United States Sustainable? Evidence from Pricing Mortgage Insurance Premiums and Non-Recourse Provisions Using the Conditional Esscher Transform (December 20, 2009). Insurance: Mathematics and Economics, Vol. 46, No. 2, 2010. Available at SSRN: https://ssrn.com/abstract=2428598

Hua Chen (Contact Author)

University of Hawaiʻi at Mānoa ( email )

2404 Maile Way, E-602e
Honolulu, HI 96822
United States
(808) 956-8063 (Phone)
(808) 956-9887 (Fax)

Samuel H. Cox

University of Manitoba - Asper School of Business ( email )

181 Freedman Crescent
Winnipeg, Manitoba R3T 5V4
Canada

Shaun S. Wang

Georgia State University's Robinson College of Business ( email )

P.O. Box 4036
Atlanta, GA 30302-4036
United States
404-413-7486 (Phone)
404-413-7499 (Fax)

HOME PAGE: http://www.rmi.gsu.edu/Faculty/pages/wang.htm

Register to save articles to
your library

Register

Paper statistics

Downloads
92
Abstract Views
575
rank
282,108
PlumX Metrics