Reverse Mortgage And House Price Risk

Reverse mortgage originated from USA, and is developed fast in recent years, absorbing more people's attention. Reverse mortgage is a new type of financial tool, it focuses on converting illiquid asset in to liquid asset and improving the elders' life quality. Can the reverse mortgage be replicated to China? It's obvious there exist such limited demand and supply. But for future reverse mortgage suppliers, the risk management will be a big problem. Future reverse mortgage institutions will face moral hazard, interest risk, longevity risk, political risk and house price risk. The house price risk will be the main risk. This paper analyzed the historic data of CREIS, measure the loss probability of different term, different loan-to-value ration, different house type according to the past Chinese house price trend. Data shows that the term of reverse mortgage should be restricted below 15 years and 10 years is preferred. So the age of eligible elders should be at least 65 years old. To control such risk, Future reverse mortgage institutions can avoid or scatter risk through limiting loan-to-value ratio, securitisation of reverse mortgage, housing asset portfolio, home equity insurance. And among all the risk control measures, limiting loan-to-value ratio is most feasible and effective.