Home equity conversion as presently constituted or proposed usually does not deal well with the potential problem of moral hazard. Once home-owners 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
6552.
Length: Date of creation: May 1998 Date of revision: Handle: RePEc:nbr:nberwo:6552
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Find related papers by JEL classification: G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
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