Longevity Risk and Fair Value Accounting
Peter M. Mazonas, CPA Life Settlement Financial, LLC
The technical parts of this chapter are extracted from testimony given by this author on November 2, 2009, before the Securities and Exchange Commission’s Life Settlement Task Force. The original copywrited documents are available at www.LifeSettlementFinancial.com.
Reverse mortgages and life settlements are sister asset classes. Both reverse mortgages and life settlements are longevity-dependent assets, where the value and thus initial pricing is dependent on an unobservable future event—the death of the borrower or the insured. This chapter investigates and demonstrates a better way of predicting life expectancy, moveout, for an individual reverse mortgage loan. The methodology described can be easily built into the loan origination process with significant advantages to both senior borrowers, while affording investors and the American taxpayers more accurate individual loan pricing, portfolio valuation, and transparency.
There has been little incentive to reevaluate and then alter the pricing components of the existing Home Equity Conversion Mortgage (HECM) reverse mortgage. These Federal Housing Administration (FHA) loans are offered by mortgage brokers, backed by a Ginnie Mae guarantee, and securitized by large institutions.
Reexamination of reverse mortgage moveout determination is important today as regulators, rating agencies, and the accounting profession meet the ...