Rationales of Mortgage Insurance Premium Structures
This paper examines the rationales for the design of mortgage insurance premium structures. The actuarially sound premium prices of several widely used structures are formally derives. Two types of cross-subsidization are identified in different structures: (1) subsidization across termination years and (2) extra-subsidization of defaulters by non-defaulters. Because these two types of subsidization exist to different degree among the structures, a borrower may self-select into certain structures to maximize (minimize) the benefits (losses) of cross-subsidies. Adverse selection arises when the borrower's characteristics cannot be completely observed by the insurer. The actuarially sound premium prices should be adjusted for such adverse selection behaviors. Numerical examples are provided to illustrate such adjustments.
Volume (Year): 14 (1997)
Issue (Month): 3 ()
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- Craig Swan, 1982. "Pricing Private Mortgage Insurance," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 10(3), pages 276-296.
- Kau, James B, et al, 1992. "A Generalized Valuation Model for Fixed-Rate Residential Mortgages," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(3), pages 279-99, August.
- Campbell, Tim S & Dietrich, J Kimball, 1983. " The Determinants of Default on Insured Conventional Residential Mortgage Loans," Journal of Finance, American Finance Association, vol. 38(5), pages 1569-81, December.
- Calhoun, Charles A & Deng, Yongheng, 2002. "A Dynamic Analysis of Fixed- and Adjustable-Rate Mortgage Terminations," The Journal of Real Estate Finance and Economics, Springer, vol. 24(1-2), pages 9-33, Jan.-Marc.
- James F. Epperson & James B. Kau & Donald C. Keenan & Walter J. Muller, 1985. "Pricing Default Risk in Mortgages," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 13(3), pages 261-272.
- Cunningham, Donald F & Capone, Charles A, Jr, 1990. " The Relative Termination Experience of Adjustable to Fixed-Rate Mortgages," Journal of Finance, American Finance Association, vol. 45(5), pages 1687-1703, December.
- Vandell, Kerry D, 1978. "Default Risk under Alternative Mortgage Instruments," Journal of Finance, American Finance Association, vol. 33(5), pages 1279-96, December.
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