Proposal for Calculating Regulatory Capital Requirements for Reverse Mortgages

We propose a new method for estimating the regulatory capital requirements for a portfolio of reverse mortgages owned by a financial institution, according to Basel II and III. The method considers house price risk, mortality risk and interest rate risk; consequently, regulatory capital requirements need to be computed using a Monte Carlo simulation procedure. The proposed method is general and can accommodate several scenarios for the reverse mortgage specifications, including fixed or variable mortgage rates and different income stream schemes (with the lump sum as a particular case). The results for the U.K. show that the reverse mortgage provider faces higher risk when the lender initially advances a higher amount, with the lump-sum case showing the highest risk, for relatively younger borrowers, for the female population, for higher interest rates and for floating mortgage rates