Mortgage Insurance Research Articles

COVID-19 mortality risk premium and the interest rate on mortgage loans

I investigate the impact of COVID-19 on the housing market, with a focus on mortgage interest rates. Rising COVID-19 fatalities result in higher mortgage interest rates. I use the Gaussian Copula approach to establish causality between COVID-19 fatalities and mortgage interest rates. Finally, I present a thorough examination of the mechanisms by which COVID-19 fatalities influence mortgage interest rates. The health concern channel is the most important. Banks raise the interest rate because they are concerned about the borrower's health or potential death. Lower interest rates for borrowers who alleviated this type of worry from banks by purchasing mortgage insurance.

Do economic uncertainty and persistence in housing prices matter on mortgage insurance?

In this paper, we employ an option-pricing model that considers the effects of autocorrelation, economic policy uncertainty, and macroeconomic conditions to derive closed-form formulas of mortgage insurance (MI). When fitting the U.S. housing and mortgage data, our pricing model produces significantly well-fitting MI market quotes. Then, we design a framework to measure the magnitudes of these three effects on MI valuation. The autocorrelation effect dominates economic uncertainty and macroeconomic effects. On average, the effects of autocorrelation, economic uncertainty, and macroeconomic factors increase the MI premium rate by 65.173 bps, 14.616 bps, and 12.114 bps, respectively. During periods of heightened monetary policy uncertainty, the magnitude of the economic uncertainty effect is greater than that of the macroeconomic effects. Moreover, the magnitude of the economic uncertainty effect increases rapidly for a higher loan-to-value ratio (LTV), particularly when the LTV exceeds a threshold of 0.8.

Practice and Capabilities of Program Housing Policy Implementation in Ukraine

The need for the growth of housing construction is considered through the prism of increasing the affordability of housing for citizens, which is determined, in particular, by the development of preferential housing financing programs. Availability of housing is a primary socioeconomic task in the difficult conditions of martial law. State and local programs make it possible to purchase housing, creating additional demand for it on the part of the population of different income levels. The aim of the article is to systematize preferential programs within the state housing policy and analyze the capacity of the most significant mechanisms for their implementation, and to identify organizational forms of increasing housing affordability by applying a programmatic approach. The study was carried out on the basis of general scientific methods: generalization, analysis and systematization. To present the results of the study, statistical methods are used: groupings, comparisons, tables. The novelty of the study is in author s’ position on the issue and basic methods of application and implementation of the program approach to increase housing affordability for the population, in particular, an effective tool for attracting funds for the local investment projects – bonds of local development funds. The article systematizes the main goals, objectives, basic principles of preferential programs; the effectiveness of the most significant mechanisms for their implementation was studied, with the determination of urgent organizational forms of application of the program approach from the point of view of the availability of housing for the population. The banks’ participation in financing the construction of housing and other infrastructure facilities in the role of escrow agents that protect and defend the interests of future property owners was proposed. The importance of ensuring the availability of mortgage insurance in conditions of high war risks was indicated. In order to improve the situation with condominium lending, it would be important to strengthen the role of budget sources as a basic element of assistance, in order to encourage lower-level bud gets to increase their contribution to programs for providing housing to the population.

The Impact of Credit Risk Mispricing on Mortgage Lending during the Subprime Boom

AbstractWe provide new evidence that mispriced mortgage insurance shifted credit supply and contributed to the mortgage boom and bust of the early 2000s. Original data on private mortgage insurance premiums from 1999 to 2016 reveal that before 2008, premiums did not vary across loans with widely different indicators of default risk. We quantify the mispricing of premiums before 2008 and show that even allowing for more optimistic beliefs, the flat premium structure resulted in cross‐subsidies and substantial adverse selection.

Where Did Redlining Matter? Regional Heterogeneity and the Uneven Distribution of Advantage

This article analyzes the regional variation in outcomes of a seemingly standardized federal neighborhood valuation principle used in home mortgage insurance grading. The objective is to highlight the contingent discriminatory and economic conditions that mediated heterogeneous housing outcomes across different parts of the United States. How did city and regional economic and demographic growth patterns vary before and during the mortgage insurance program implemented through the Federal Housing Administration (FHA)? How might this have shaped loan guarantee patterns? How does preexisting racial housing discrimination relate to outcomes? Adopting an orientation that centers on Whiteness and the benefits of mortgage finance for certain groups and neighborhoods, this analysis uses a Bayesian hierarchical framework to investigate the degree of the FHA’s influence between 1940 and 1970, here proxied by the Home Owners’ Loan Corporation maps, on A or B (“AB”) graded neighborhoods versus C graded neighborhoods in different cities. This article studies how home values and homeownership change over time and whether there are regional variations in the influence of these grades. It also studies what longitudinal socioeconomic patterns might explain the persistence or decline of the AB effect over time. Findings show cities in the West Coast, Southwest, and northern central United States that saw the most housing construction also had the highest proportions of FHA loans to overall dwelling units. There is also a distinctive consistency and persistence of benefit on home value and homeownership to AB graded neighborhoods in these cities, possibly owing to regional shifts in the industrial landscape.

Mortgage Costs as a Share of Housing Costs—Placing the Cost of Credit in Broader Context

Housing affordability is a key policy concern and an important component of sustainable homeownership. It follows that reducing housing costs without increasing the risk of mortgage default is a critical approach to sustaining homeownership for current and future generations. In this paper, we break down the different elements of housing costs, specifically focusing on the nuances of mortgage costs. We use internal Fannie Mae data to establish a pro forma of housing costs for different owner-occupant borrower profiles over a typical ownership period (all homebuyers, first-time homebuyers [FTHBs], and low-income first-time homebuyers [LI FTHBs]). We find that the biggest contributors to overall housing costs are transactions costs, ongoing utility expenses, property taxes, home improvement costs, and the component of the mortgage interest rate that compensates investors for the time value of money, with utilities and home improvement costs particularly conspicuous for FTHBs and LI FTHBs. The guaranty fees charged by the government-sponsored enterprises and private mortgage insurance are estimated to be less than 6% of the cost of homeownership. These general patterns hold across racial and ethnic groups, although mortgage insurance alone is roughly 6% of total costs for Black and Hispanic FTHBs and LI FTHBs compared to 2% for white FTHBs and LI FTHBs. Overall, our findings suggest that nonmortgage housing costs are key areas that policymakers should focus on to reduce housing costs and foster sustained homeownership rates.

Childhood Lead Poisoning 1970-2022: Charting Progress and Needed Reforms.

Childhood lead poisoning prevention in the United States was marked by a largely failed medical approach from 1971 to 1990; an emergent (but small) healthy housing primary prevention strategy from 1991 to 2015; and implementation of large-scale proven interventions since then. Childhood Lead Poisoning Prevention & Healthy Housing. Historic and recent health and housing data from the National Health and Nutrition Examination Survey (NHANES) and the American Healthy Homes Survey (AHHS) were retrieved to analyze trends and associated policy gaps. Approximately 590 000 US children aged 1 through 5 years had elevated blood lead levels of 3.5 μg/dL and greater in 2016, and 4.3 million children resided in homes with lead paint in 2019. Despite large improvements, racial and other disparities remain stubbornly and statistically significant. The NHANES and the AHHS require larger sample sizes. The Centers for Disease Control and Prevention has not published children's blood lead surveillance and NHANES data in several years; the Department of Housing and Urban Development (HUD) has no analogous housing surveillance system; and the Environmental Protection Agency (EPA) and the Occupational Safety and Health Administration (OSHA) have not updated training, Superfund, and occupational standards in decades. The nation has been without a plan and an associated budget for more than 2 decades. Congress has not reformed the nation's main lead poisoning prevention laws in more than 30 years. Such reforms include stopping US companies from producing new residential lead paint in other countries; enabling the disclosure law to identify all residential lead hazards; closing loopholes in federally assisted housing regulations and mortgage insurance standards; harnessing tax policy to help homeowners mitigate lead hazards; streamlining training requirements; increasing the size of health and housing surveys and surveillance systems; and updating housing codes, medical guidance, dust lead standards, training, Superfund, and worker exposure limits. Congress and the president should reauthorize a cabinet-level task force (dormant since 2010) to develop a new strategic plan with an interagency budget to implement it. These reforms will scale and optimize markets, subsidies, enforcement, and other proven interventions to end ineffective, costly, harmful, and irrational cost shifting that threatens children, workers, and affordable housing.

The Propagation of Demand Shocks through Housing Markets

Housing demand stimulus produces a multiplier effect by freeing up owners attempting to sell their current home, allowing them to reenter the market as buyers. Exploiting a shock to first-time home buyer demand caused by a cut in mortgage insurance premiums, we find that homeowners buy their next home sooner when the probability of their current home selling increases. We build and calibrate a search model that explains these findings as a result of homeowners avoiding the cost of owning two homes simultaneously. Simulations demonstrate that stimulus to home buying generates a substantial multiplier effect, particularly in cold markets. (JEL R21, R31, R38)

On the Impact of Federal Housing Policies on Racial Inequality

Using data on the value of Federal Housing Administration (FHA) mortgage insurance between 1935 and 1939, I estimate the effect of the agency's program on racial disparities in home ownership and home values. The distance between an FHA office and counties within its jurisdiction is used as an instrument. I find that insurance activity had a negligible effect on the racial gap in home ownership and a sizable effect on the gap in home values. Results suggest that while African American households continued to acquire homes, they may have chosen lower-priced properties, as they lacked the same access to credit as White buyers.

Investigation of the Mortgage Insurance Market in Russia

Investigation of the Mortgage Insurance Market in Russia

Moral Hazard during the Housing Boom: Evidence from Private Mortgage Insurance

Abstract We provide novel evidence of misaligned incentives fueling a portion of the 2000s mortgage boom. We document that private mortgage insurance (PMI) companies expanded insurance issuance on high-risk mortgages purchased by Fannie Mae and Freddie Mac at the tail end of the housing boom, without changing pricing and despite knowledge of heightened housing risk. The expansion of PMI facilitated an unprecedented increase in Fannie and Freddie’s risky purchases, extending the mortgage boom into 2007 and precipitating their collapse. We argue that this unraveling reflects a general moral hazard problem in insurance, coupled with misaligned incentives in the government-backed mortgage market.

Potential Changes to the FHA COVID-19 Modification Options to Keep More Borrowers in Their Homes

Millions of homeowners are having difficulty affording their monthly mortgage payments because of the COVID-19 pandemic. The most vulnerable group of borrowers is concentrated within the Federal Housing Administration (FHA) program, with over 900,000 borrowers who are more than 90 days delinquent. Research provides clear evidence that immediate and substantial payment reduction is the most effective mortgage default prevention tool available. This paper suggests several changes to the FHA COVID-19 Home Retention Options that FHA should consider to provide more borrowers with deeper payment reductions, many at no cost to the Mutual Mortgage Insurance Fund, that would provide borrowers in need of financial assistance with greater eligibility as well as more substantial payment reductions that help them retain their home and avoid foreclosure. We estimate the incremental payment relief and resulting reduction in foreclosures that would be created by each of our proposed changes, and demonstrate how our suggestions would increase the availability of mortgage modifications for borrowers with lower incomes and higher debt-to-income ratios, particularly Black and Hispanic borrowers.

Moral Hazard During the Housing Boom: Evidence from Private Mortgage Insurance

Was the mortgage boom fueled by optimism around house prices, or did misaligned incentives in the mortgage industry also play a role? In this paper, we provide novel evidence of a role for misaligned incentives. We document that private mortgage insurance (PMI) companies dramatically expanded insurance issuance on high-risk mortgages purchased by Fannie Mae and Freddie Mac at the tail-end of the housing boom, without changing pricing and despite knowledge of heightened housing risk. The PMI expansion facilitated an unprecedented increase in Fannie Mae's and Freddie Mac's purchases of high-risk mortgages, extending the mortgage boom into 2007 and precipitating their collapse as well as that of the PMI industry. We argue that this unraveling reflects a general moral hazard problem associated with insurance providers coupled with misaligned incentives in the government-backed portion of the mortgage market.

Insurance losses caused by residential housing flood events

PurposeThe purpose of this research study is to determine whether flood-damaged residences located in the USA are remaining unrepaired because of the lack of flood insurance coverage. Unrepaired flooded dwellings are subsequently being foreclosed with mortgage-insurance claims being paid to lenders. This paper aims to examine if weather events that cause flooding impact the losses suffered by mortgage insurers and homeowners.Design/methodology/approachTwo fully modified least squares regression models are done using losses experienced by two mortgage insurance companies. The AM Best insurance rating information for a 16-year period or years 2002–2017 is used to study whether the loss ratios experienced by two companies underwriting private mortgage insurance (PMI) are statistically correlated to National Flood Insurance Program (NFIP) claim levels. The assumption is that higher flood insurance claims are a proxy for more severe weather events during a particular year which results in flooding that damage residences.FindingsThe NFIP claims coefficient is positive and significant for both companies being examined. This indicates that the more serious the flooding event during a specific year, the higher the losses experienced by the private mortgage insurer. The R2 results for the regression models were 0.673–0.695. The income variable has a negative coefficient which was significant. It indicates that falling income lead to rising mortgage insurer losses. The NFIP variable was significant with a positive coefficient.Research limitations/implicationsThe mortgage insurance industry is dominated by several companies at any point in time. During the 16-year study period, some companies have become insolvent, merged with other companies or recently started underwriting mortgage insurance. One company was diversified writing multiple lines of property insurance. There were only two insurers with complete financial information for the specified study period.Practical implicationsThere are currently five mortgage insurers operating in the USA. A serious flood event could cause the insolvency of some of these companies. This would reduce the competition existing in the default insurance market. The financial markets for real estate loans price mortgages based on the availability and the ability to secure mortgage insurance for high loan-to-value properties. There is federal mortgage insurance available for certain types of residential loans.Social implicationsThere are a limited number of insurers writing flood insurance. These companies can pick or reject dwellings and/or commercial properties to underwrite for insurance. The goal of phasing out insurance through the NFIP may prove impossible to achieve. A flood event without insurance would cause serious financial consequences to property owners, loan delinquencies and could depress the local economy for years. Competition from private mortgage insurers may intensify the adverse selection already being experienced by the NFIP. Private insurers would select the lower risk flood applications leaving the more risky insurance to be covered by the NFIP.Originality/valuePrior research focused on financial variables impacting PMI and weather factors affecting flood insurance claims. Financial ratios published in the AM Best rating guide for the USA and Canada were used to examine whether or not PMI losses are indirectly affected by flooding events as measured by NFIP variable. Comparing two separate lines of insurance and their impact on each other has not been studied by prior researchers.

Prepayment risk in reverse mortgages: An intensity-governed surrender model

Reverse mortgages have been an important financial tool for cash poor seniors to release home equity. In the United States, most reverse mortgages are insured by the Federal Housing Administration (FHA) through the Home Equity Conversion Mortgage (HECM) program. Previous literature on reverse mortgage insurance often considers mortality as the main loan termination risk, and less attention has been paid to terminations due to loan prepayment, such as refinancing, repayment, and move-out. However, prepayment of reverse mortgages presents a significant risk to lenders and the HECM program. The Report to Congressional Requesters (United States Government Accountability Office, 2019) shows that about 28.5% of the total known reverse mortgage terminations in Fiscal Years 2014–2018 were attributed to loan refinancing, repayment, or move-out due to non-health reasons, whereas 48.6% of known terminations were attributed to mortality. In this paper, we employ an exogenous intensity-governed surrender model to study prepayment risk in reverse mortgages. The proposed model captures both macro-economic and non-economic drivers in surrender decisions. This paper complements existing studies of surrender behavior in reverse mortgages and provides a novel approach to incorporate prepayment risk into reverse mortgage pricing.

MORTGAGE INSURANCE: PROBLEMS AND METHODS OF SOLUTION

The article analyzes the key problems of the organization of mortgage insurance, implemented as a cross-product in the implementation of the bank product of a mortgage loan. The methods of solution for the problems that arise in the mortgage insurance market are proposed

Waiting period from diagnosis for mortgage insurance issued to cancer survivors

The Massart (J Cancer Policy 15:70–71, 2018) testimonial illustrates the difficulties faced by patients having survived cancer to access mortgage insurance securing home loan. Data collected by national registries nevertheless suggest that excess mortality due to some types of cancer becomes moderate or even negligible after some waiting period. In relation to the insurance laws passed in France and more recently in Belgium creating a right to be forgotten for cancer survivors, the present study aims to determine the waiting period after which standard premium rates become applicable. Compared to the French and Belgian laws, a waiting period starting at diagnosis (as recorded in national databases) is favored over a waiting period starting at the end of the therapeutic treatment protocol. This aims to avoid disputes when a claim is filed. Since diagnosis is often recorded in the official registry database, as is the case for the Belgian Cancer Registry, its date is reliable and unquestionable in case of claim. Based on 28,994 melanoma and thyroid cancer cases recorded by the Belgian Cancer Registry, the length of the waiting period is assessed with the help of widely-accepted tools from biostatistics, including relative survival models and time-to-cure indicators. It turns out for instance that a waiting period of 4 years after diagnosis is enough for 30-year-old thyroid cancer patients. This appears to be similar to the 3-year period starting at the end of treatment protocol according to the Belgian law in such a case.

Housing Choice Under Borrowing Constraints

ABSTRACT A dramatic decline in the maximum loan amount eligible for Federal Housing Administration (FHA) mortgage insurance in the Salt Lake City, Utah, metropolitan statistical area between 2013 and 2014 provides a natural experiment in the impact of borrowing constraints on housing decisions. Using a difference-in-differences design within a seemingly unrelated regression model, we estimate the impact of this constraint on the size and location of homes purchased by FHA borrowers. We find that borrowers likely constrained by the new loan limits purchased smaller homes with larger downpayments than similar borrowers prior to the loan limit decline. Likely constrained borrowers do not appear to compromise on location, including the quality of local schools. The net effect of the housing choices compelled by the reduction in loan limits does not appear to change the credit risk of borrowers.

Republic of Korea

This note presents the systemic risk analysis conducted for the Republic of Korea in the course of the 2019 Korea FSAP. It comprises a forward-looking solvency analysis for banks, insurers, and pension funds, a liquidity stress test for banks, and an assessment of network and interconnectedness for a wide range of financial sector entities and their ties to the real economy. Various structural characteristics of Korea’s economy and its financial system informed the features and focus for its forward-looking risk analysis. They include Korea’s strong export orientation, limited diversification, and its key role as a node in regional and international supply chains. Korea’s financial system has grown by 40 percentage points of GDP since 2013, enhancing the importance of a deep financial sector analysis as conducted through the FSAP. Mortgage insurance schemes are widely used—which was reflected in the way the risk assessment for banks was conducted. Korea’s life and non-life insurance sector is large, highly concentrated and saturated. Fintech developments keep accelerating, in terms of its Open Banking system and e-money providers. Demographic developments in Korea are among the most adverse world-wide, implying a continuous drag on demand, downward pressure on interest rates, financial firms’ income, and hence their capitalization unless they will be altering their business models.

Loan to Value Caps and Government-Backed Mortgage Insurance: Loan-Level Evidence from Dutch Residential Mortgages

Using loan level data on mortgage loans originated by Dutch banks during 1996 to 2015, we analyse the determinants of the incidence of non-performance. We find that both the originating loan-to-value ratio (OLTV) and the debt-service-to-income ratio are significantly positively associated with the probability of non-performance. The results suggest that mortgages with government-loan-guarantees perform better. Moreover, several mortgage loan and borrower characteristics, such as the (interest-only) loan type and the underwater status of the borrower, increase credit risk. Our model predictions suggest a novel policy implication: in order to avoid acceleration of non-performance probabilities, the OLTV-limit should be set to about 70–80% for uninsured mortgages, and to about 90% for those with mortgage insurance.