Risk mitigation is the key for the success of any financial product including reverse mortgage. Some of the risk mitigation techniques which the providers can apply to reduce the risk on their books
The first mitigation of risk can be done at the time of providing loans. This can be done through proper verification of the title of the property, age of the borrower; his/her credit analysis etc. This reduces the risk of default by the borrower.
To avoid interest rate risk, the lender can go for variable interest rates based on some market benchmark like MIBOR. This will also reduce the risk of Pre-payment as the borrower will not have interest arbitrage on prepayment of the loan.
As the product has significant longevity risk, the lender can do a detailed mortality trend analysis on a macro level and also in the market where it is operating.
The lender can look at spreading the business across the country by promoting the product in secondary and tertiary cities also so that the law of large numbers may work properly and if the provider has a bad experience in one market; it can be compensated with good experience in other cities.
The lender can develop home equity conversion mortgages for all households and not just for elderly. This will significantly reduce loan to value ratio and that will take care of many of the risks inherent in the product.
One of the most effective ways of mitigation risk is securitization It involves many other financial players and thus it spreads the risk of default/prepayment to many other participants. USA has a history of eight year of securitization of its Reverse Mortgage. In the Repayment schedule, some default conditions or changes that affect the security of the loan for the lender that can make reverse mortgages payable must also be added, like :
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