A Study on the Main Determination of Mortgage Risk: Evidence from Reverse Mortgage Markets

Abstract

The main determination of mortgage risk factors is undoubtedly related to the housing price .In this article, we employ threshold GARCH process in practical analysis, to capture the house price dynamic on the logarithm return. This study also estimates the housing price volatility in the presence of stationary variance property from the threshold GARCH model and its implied volatility can serve as a benchmark for the pricing reverse mortgage derivatives. Our results have important implications for hedging risk of reverse mortgages. To our best knowledge, this paper is the first study employing Poisson Regression approach to look at the housing prices risk of reverse mortgage incorporated with its number of loans.

An analytical approximation of option prices via TGARCH model

“…Following Zakoian (1994), some researchers have studied and used the TGARCH model to estimate the volatility of other underlying asset prices, such as carbon, crude oil, ethanol, natural gas, coal-three, corn and sugar; see Alberola et al (2008); Hasan et al (2013);Trujillo-Barrera et al (2012) and Godana et al (2014) Moreover, the TGARCH model is used to describe mortgage risk factors of housing price and capture the house price dynamic on the logarithmic return and to estimate the housing price volatility for the pricing reverse mortgage derivatives (Lee et al, 2015). For financial market research, Sabiruzzaman et al (2010) investigated the pattern of volatility in the daily trading volume index of the Hong Kong stock exchange by using two approaches; GARCH and TGARCH models.…”

Housing Price Dynamics, Mortgage Credit and Reverse Mortgage Demand: Theory and Empirical Evidence

“…Key studies of the major demand factors for reverse mortgages include Redfoot, Scholen and Brown () and Lee, Chen and Shyu (). Limitations on reverse mortgage demand are generally attributed to high costs ( i.e ., insurance payments, tax fees and interest rates), because mortgage credit is too poor to make it actuarially feasible to neutralize consumption‐smoothing benefits over time.…”