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Moral Hazard in Home Equity Conversion

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Abstract

Home equity conversion as presently constituted or proposed usually does not deal well with the potential problem of moral hazard. Once homeowners know that the risk of poor market performance of their homes is borne by investors, they have an incentive to neglect to take steps to maintain the homes' values. They may thus create serious future losses for the investors. A calibrated model for assessing this moral hazard risk is presented that is suitable for a number of home equity conversion forms: 1) reverse mortgages, 2) home equity insurance, 3) shared appreciation mortgages, 4) housing partnerships, 5) shared equity mortgages and 6) sale of remainder interest. Modifications of these forms involving real estate price indices are proposed that might deal better with the problem of moral hazard.

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File URL: http://cowles.econ.yale.edu/P/cd/d11b/d1177.pdf
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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1177.

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Length: 29 pages
Date of creation: May 1998
Date of revision:
Publication status: Published in Real Estate Economics (2000), 28(1): 1-31
Handle: RePEc:cwl:cwldpp:1177

Note: CFP 1014.
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Postal: Yale University, Box 208281, New Haven, CT 06520-8281 USA
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

Related research

Keywords: Reverse mortgages; home equity insurance; shared appreciation mortgages; housing partnerships; shared equity mortgages; sale of remainder interest; moral hazard; real estate price indices; home maintenance; home improvements;

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References

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  1. Karl E. Case & Robert J. Shiller & Allan N. Weiss, 1991. "Index-Based Futures and Options Markets in Real Estate," Cowles Foundation Discussion Papers 1006, Cowles Foundation for Research in Economics, Yale University.
  2. Genesove, David & Mayer, Christopher J, 1997. "Equity and Time to Sale in the Real Estate Market," American Economic Review, American Economic Association, vol. 87(3), pages 255-69, June.
  3. Asabere, Paul K & Huffman, Forrest E, 1993. "Price Concessions, Time on the Market, and the Actual Sale Price of Homes," The Journal of Real Estate Finance and Economics, Springer, vol. 6(2), pages 167-74, March.
  4. Karl E. Case & Robert J. Shiller, 1989. "The Efficiency of the Market for Single-Family Homes," NBER Working Papers 2506, National Bureau of Economic Research, Inc.
  5. Michel Glower & Donald R. Haurin & Patric H. Hendershott, 1995. "Selling Price and Selling Time: The Impact of Seller Motivation," NBER Working Papers 5071, National Bureau of Economic Research, Inc.
  6. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  7. Thomas J. Miceli & C.F. Sirmans, 1994. "Reverse Mortgages and Borrower Maintenance Risk," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 22(2), pages 433-450.
  8. Donald Haurin, 1988. "The Duration of Marketing Time of Residential Housing," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 16(4), pages 396-410.
  9. Asabere, Paul K & Huffman, Forrest E & Johnson, Rose L, 1996. "Contract Expiration and Sales Price," The Journal of Real Estate Finance and Economics, Springer, vol. 13(3), pages 255-62, November.
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Citations

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Cited by:
  1. Ebrahim, M. Shahid, 2009. "Can an Islamic model of housing finance cooperative elevate the economic status of the underprivileged?," Journal of Economic Behavior & Organization, Elsevier, vol. 72(3), pages 864-883, December.
  2. Arthur Grimes & Suzi Kerr & Andrew Aitken, 2004. "Bi-Directions Impacts of Economic, Social and Environmental Changes and the New Zealand Housing Market," Working Papers 04_09, Motu Economic and Public Policy Research.
  3. William Goetzmann & Matthew Spiegel, 2000. "The Policy Implications of Portfolio Choice in Underserved Mortgage Markets," Yale School of Management Working Papers ysm161, Yale School of Management, revised 01 Mar 2001.
  4. Mitchell, Olivia S. & Piggott, John, 2004. "Unlocking housing equity in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 18(4), pages 466-505, December.
  5. Mayer, Chris & Piskorski, Tomasz & Tchistyi, Alexei, 2013. "The inefficiency of refinancing: Why prepayment penalties are good for risky borrowers," Journal of Financial Economics, Elsevier, vol. 107(3), pages 694-714.
  6. Sanders, Anthony B. & Slawson, V. Jr., 2005. "Shared appreciation mortgages: Lessons from the UK," Journal of Housing Economics, Elsevier, vol. 14(3), pages 178-193, September.
  7. Joseph Nichols, 2004. "A Life-cycle Model with Housing, Portfolio Allocation, and Mortgage Financing," Econometric Society 2004 North American Winter Meetings 205, Econometric Society.
  8. Andrew Caplin & William Goetzmann & Eric Hangen & Barry Nalebuff & Elisabeth Prentice & John Rodkin & Matthew Spiegel & Tom Skinner, 2003. "Home Equity Insurance: A Pilot Project," Yale School of Management Working Papers ysm372, Yale School of Management, revised 23 Jan 2006.
  9. Diego A. Salzman & Remco C.J. Zwinkels, 2013. "Behavioural Real Estate," Tinbergen Institute Discussion Papers 13-088/IV/DSF57, Tinbergen Institute.
  10. Ebrahim, M. Shahid & Shackleton, Mark B. & Wojakowski, Rafal M., 2011. "Participating mortgages and the efficiency of financial intermediation," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 3042-3054, November.
  11. Hu, Xiaoqing, 2005. "Portfolio choices for homeowners," Journal of Urban Economics, Elsevier, vol. 58(1), pages 114-136, July.
  12. Engelhardt, Gary V., 2003. "Nominal loss aversion, housing equity constraints, and household mobility: evidence from the United States," Journal of Urban Economics, Elsevier, vol. 53(1), pages 171-195, January.

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