Speaker: Dr. Junsen Tang, University of St. Thomas, St. Paul, Minnesota.
Abstract: This talk will discuss an optimal surrender analysis of the HECM reverse mortgage offered to elderly homeowners as a retirement planning solution. Reverse mortgages generally have open maturity dates, which have raised concerns about the impact of borrowers’ early termination on the program viability. In our paper, we derive the borrower optimal surrender strategy as a function of the underlying value of the home used as collateral for HECM contracts. Using a probabilistic approach to American option pricing, we present a decomposition result for the value of the contract as the sum of its European counterpart without the surrendering provision and an early exercise premium. Based on the resulting surrender boundary, we explain the existing market evidence about borrower rational lapsation and offer important policy implications to the prevalent HECM program.
Friday, May 20, 2022 at 2:30pm to 3:30pm
7800 York Road, Room 219
7800 York Rd, Towson University, Towson, MD 21204, USA