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A Simple Model of Mortgage Insurance

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  • Jan K. Brueckner

Abstract

This paper uses a two-period model to analyze the borrower's choice of an optimal time pattern of mortgage payments in a world where future house values are uncertain. Since a decline in values can make the borrower's equity negative, leading to default on the mortgage, lenders in the model will require the purchase of mortgage insurance. The premium on the insurance policy will depend on the riskiness of the mortgage, which in turn depends on the magnitude of the initial mortgage payment. Mortgages with large (small) first payments will carry low (high) insurance premiums. Taking this fact into account, the borrower decides on the optimal riskiness of his mortgage. Borrowers who discount the future heavily choose risky mortgages carrying high insurance premiums, while those who place a higher value on future consumption opt for less risky contracts carrying low (or zero) premiums. Copyright American Real Estate and Urban Economics Association.

Suggested Citation

  • Jan K. Brueckner, 1985. "A Simple Model of Mortgage Insurance," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 13(2), pages 129-142.
  • Handle: RePEc:bla:reesec:v:13:y:1985:i:2:p:129-142
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    Cited by:

    1. Ming Pu & Gang-Zhi Fan & Chunsheng Ban, 2016. "The Pricing of Mortgage Insurance Premiums Under Systematic and Idiosyncratic Shocks," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 83(2), pages 447-474, June.
    2. Onder, Zeynep, 1998. "Individual and Neighborhood Effects on FHA Mortgage Activity: Evidence from HMDA Data," Journal of Housing Economics, Elsevier, vol. 7(4), pages 343-376, December.

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