Continuous Repayment Structures in Japanese Housing Finance for Elderly People: Applications To Mitigate Counterparty Risk Through U.S. Reverse Mortgage Design

Christopher Feather
Kalamu Consulting

What innovations can improve the risk management of the Home Equity Conversion Mortgage (HECM) and HECM mortgage-backed securities (HMBS) programs? The Japanese housing finance sector has relevant insights for reverse mortgage design in the United States. Through the Japan Housing Finance Agency, or JHF, the Special Repayment System for the Elderly program can inform the strengthening of U.S. efforts for senior citizens. As HECM and HMBS counterparties confront challenges with the financial sustainability of their business operations, recurring repayment structures, like those embedded in Japanese housing finance products, can be considered to help alleviate strains on lenders and, more particularly, issuers and servicers.

This article assesses the alternative approach of continuous payments from Japanese loan design for elderly people within the American reverse mortgage context. The conclusion is that broad-based collaboration and mutual awareness are required to manage cash flow timing risks and advanced servicing liabilities with stakeholders toward strategically advancing HECM and HMBS market development. Collective action to mitigate counterparty risk can ensure the option is preserved—if not bolstered in a responsible manner—for aged homeowners seeking to financially supplement their income at affordable terms while continuing to live in their homes.