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Pricing FHA Mortgage Default Insurance

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  • Donald F. Cunningham
  • Patric H. Hendershott

Abstract

The fair premia on FHA mortgage default insurance contracts are computed under alternative assumptions regarding the expected house price inflation rate and its variance and homeowner's default costs. The contracts considered vary by amortization schedule (15 and 30 year level-payment mortgages and two graduated-payment mortgages) and initial loan-to-value ratio (80 to 95.8percent) .The results indicate a wide variation in fair insurance premia. Because FHA charges all borrowers the same premia, large cross-subsidies exist within the program, with borrower's obtaining low loan-to-value or rapidly amortizing loans subsidizing borrowers with high loan-to-value or negative amortizing loans. Moreover, the movement toward insuring riskier loans --graduated payment, price-level adjusted and adjustable rate -- without increasing insurance premia seems almost certain to lead to significant overall losses for the program.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1382.

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Date of creation: Jun 1984
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Publication status: published as Housing Finance Review, Vol. 3, No. 4, pp. 373-392, (October 1984).
Handle: RePEc:nbr:nberwo:1382

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Cited by:
  1. Elsa Fornero & Annamaria Lusardi & Chiara Monticone, 2009. "Adequacy of Saving for Old Age in Europe," CeRP Working Papers 87, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  2. Harald Uhlig, 2010. "Economics and Reality," NBER Working Papers 16416, National Bureau of Economic Research, Inc.

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