Transferring home price risk to investors from individual borrowers

Abstract

PurposeThe purpose of this paper is to outline a new approach to risk management that will create an innovative marketplace mechanism to deal with risk.Design/methodology/approachThe paper discusses current risk management practice and proposes a novel new approach to risk management with an example.FindingsThis paper proposes the creation of a restructured mortgage product to transfer the home price volatility risk explicitly to investors and portfolio managers.Originality/valueThis paper proposes product innovation to transfer risk. The idea is original and is a conceptual viewpoint aimed at urging the industry to implement the concept. The recent credit crisis highlights the problem of unhedged home price volatility born by individual borrowers. As borrowers are not equipped to hedge this risk, it is important to restructure the mortgage to explicitly transfer the risk of home price volatility to investors and mortgage lenders.