Is Reverse Mortgage for Thai elderly?

Abstract

A reverse mortgage is a loan, pioneered in the United States, available to elderly homeowners that allows them to convert the equity in their homes into cash for their spending. Recently in Thailand, the Government Savings Bank has offered reverse mortgage to Thai elderly as one of the policy measures to prepare for the aging society. The objective of this study is to assess whether the loan is appropriate for Thai elderly. To provide the basis of understanding of the reverse mortgage offered by the Government Savings Bank, the study begins by explaining the reverse mortgage loan under the Home Equity Conversion Mortgage (HECM) program and reviewing previous studies in several areas. Then the study assesses the adequacy of the monthly incomes from the loan received by Thai elderly, using a simple example to compare the received incomes from the Government Savings Bank and those from the comparable HECM loans. It is found that the monthly incomes received under the HECM are higher than those of the Government Savings Bank. In addition, the study estimates the put option value of the borrower from the nonrecourse feature of the loan using various models. The simple closed-form Black-Scholes put option values are significantly lower than those of the simulation approach, due to the time-varying strike and non-European features of the loan. Moreover, the put values appear to be lower than the fixed transaction costs of the loan, even in the case of allowing for the jump in housing price such as in the crisis. Overall the results suggest that the Reverse Mortgage loan is too expensive for Thai elderly. The government should consider the mortgage insurance program which enables banks to lend on more favorable terms.