Reverse Mortgages and Linked Securities: The Complete Guide to Risk, Pricing, and Regulation

CHAPTER 11

The Secondary Market in Home Equity Conversion Mortgages

Charles A. Stone Brooklyn College, City University of New York

 

Anne Zissu Citytech, City University of New York, Polytechnic University

 

 

 

 

Home equity is an important asset class. For senior citizens the importance of this asset class is magnified by the income constraints many seniors face. Reverse mortgages offer seniors a way of liquidating the equity of their homes without increasing periodic expenditures that accompany increased leverage. The reverse mortgage in general and the Home Equity Conversion Mortgage (HECM) in particular, which is the focus of this chapter, allow seniors to issue debt against a portion of their home equity. The credit drawn against the home equity using the HECM amounts to a series of secured zero-coupon bonds against the equity in their home.

THE REVERSE MORTGAGE TO LIQUIDATE HOME EQUITY

The decision about how resources should flow between generations is complex. We do not address the choice of leaving wealth to heirs or having heirs protect their inheritance by substituting private transactions for market transactions. In this chapter our discussion is a brief description of the HECM, the HMBS, and the HMBS REMIC. The Home Equity Conversion Mortgage (HECM) was introduced by HUD in 1989 as a pilot program and became permanent in 1998 (Evaluation Report of FHA’s Home Equity Conversion Mortgage Insurance Demonstration Contract No. DU100C000005978, Task Order No. 12, Final Report, ...