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An innovative form of credit enhancement for securitized reverse mortgages Finding paths of cross‐over points isolated from changes in interest and inflation rates

An innovative form of credit enhancement for securitized reverse mortgages Finding paths of... Purpose – One of the main risks to investors in securitized reverse mortgages is that the value of the reverse mortgage exceeds that of the property. The purpose of this paper is to develop a model that determines paths of constant cross‐over points across any pairs of interest and inflation rate. Design/methodology/approach – To study the behavior of hyper‐surfaces, multivariate calculus was used. Findings – Knowing that the value of a reverse mortgage increases above that of the property value once it goes beyond the cross‐over point t*, it is possible to construct a pool of reverse mortgages, such that for any pairs of inflation rate and interest rate (x, r), these reverse mortgages move along lines of constant cross‐over points t*. Originality/value – The paper develops a model that determines paths of constant cross‐over points across any pairs of interest and inflation rate, which can be used when structuring pools of reverse mortgage‐backed securities, to credit‐enhance investors. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Risk Finance Emerald Publishing

An innovative form of credit enhancement for securitized reverse mortgages Finding paths of cross‐over points isolated from changes in interest and inflation rates

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Publisher
Emerald Publishing
Copyright
Copyright © 2013 Emerald Group Publishing Limited. All rights reserved.
ISSN
1526-5943
DOI
10.1108/JRF-03-2013-0015
Publisher site
See Article on Publisher Site

Abstract

Purpose – One of the main risks to investors in securitized reverse mortgages is that the value of the reverse mortgage exceeds that of the property. The purpose of this paper is to develop a model that determines paths of constant cross‐over points across any pairs of interest and inflation rate. Design/methodology/approach – To study the behavior of hyper‐surfaces, multivariate calculus was used. Findings – Knowing that the value of a reverse mortgage increases above that of the property value once it goes beyond the cross‐over point t*, it is possible to construct a pool of reverse mortgages, such that for any pairs of inflation rate and interest rate (x, r), these reverse mortgages move along lines of constant cross‐over points t*. Originality/value – The paper develops a model that determines paths of constant cross‐over points across any pairs of interest and inflation rate, which can be used when structuring pools of reverse mortgage‐backed securities, to credit‐enhance investors.

Journal

The Journal of Risk FinanceEmerald Publishing

Published: Aug 9, 2013

Keywords: Reverse mortgages; Cross‐over; Securitization; Longevity risk; Credit enhancement

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