Contracting and Crossover Risk
Posted: 26 Oct 1999
A pricing model is developed for a reverse mortgage contract where the borrower receives payments either as a lump sum or in an annuity while the loan balance accumulates as a claim against the house. No underwriting criteria on income are applied. One risk of default is that the borrower will remain in the house after the negatively amortizing loan balance exceeds the value of the house. An explicit pricing model of the reverse mortgage permits the evaluation of this default "crossover" option. Alternative methods involving life insurance contracts and securitization are compared as secondary market channels.
JEL Classification: M00
Suggested Citation: Suggested Citation
Chinloy, Peter and Megbolugbe, Isaac F., Contracting and Crossover Risk. JOURNAL OF THE AMERICAN REAL ESTATE AND URBAN ECONOMICS ASSOCIATION, Vol 22 No 2 Summer, 1994, Available at SSRN: https://ssrn.com/abstract=5596
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