Stochastic Modeling of Federal Housing Administration Home Equity Conversion Mortgages with Low‐Cost Refinancing

Federal Housing Administration‐insured reverse mortgages, known as Home Equity Conversion Mortgages (HECMs), did not originally have a provision for low‐cost refinancing. If a borrower's house value increased faster than expected, the borrower could not tap that additional equity without terminating the first loan and originating a new HECM loan with full closing costs. We test several low‐cost refinancing options using a stochastic simulation model that allows interest rates and house prices to vary in historically accurate patterns. Low‐cost refinancing decreases the net value of the fund by 54% to $98.5 million, but it remains positive in 80% of the trials.