Contracting and Crossover Risk

Posted: 26 Oct 1999

See all articles by Peter T. Chinloy

Peter T. Chinloy

American University - Department of Finance and Real Estate

Isaac F. Megbolugbe

Federal National Mortgage Association (Fannie Mae) - Office of Housing Research

Abstract

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

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

Peter Chinloy

American University - Department of Finance and Real Estate ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States
202-885-1951 (Phone)
202-885-1992 (Fax)

Isaac F. Megbolugbe (Contact Author)

Federal National Mortgage Association (Fannie Mae) - Office of Housing Research ( email )

4000 Wisconsin Ave. NW
Washington, DC 20016
United States
202-274-5065 (Phone)
202-274-8111 (Fax)

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