This study sets up a contingent-claim framework incorporating the default risk of a mortgage insurer and the capital forbearance of regulators to value mortgage insurance (MI) contracts. We further investigate how critical policy parameters, such as capital requirements, prompt closure, and time of delay, relate to the MI premium by deriving a closed-form solution and evaluating its partial derivatives. The solutions show a negative cross effect of forbearance threshold and time delay on MI, indicating that a lower forbearance threshold and a longer period of time delay both expand their positive impacts on the price of MI. The numerical results show that an insurer’s default risk premium can be substantial in the presence of a catastrophic risk in the housing price. For mortgage insurers with a lower asset-liability ratio, the effect of the interest rate risk on the MI premium is more obvious and noteworthy. Moreover, the forbearance threshold effect and capital requirements effect are more significant than the time delay effect on the MI premium.
The Journal of Real Estate Finance and Economics – Springer Journals
Published: Oct 5, 2015
It’s your single place to instantly
discover and read the research
that matters to you.
Enjoy affordable access to
over 18 million articles from more than
15,000 peer-reviewed journals.
All for just $49/month
Query the DeepDyve database, plus search all of PubMed and Google Scholar seamlessly
Save any article or search result from DeepDyve, PubMed, and Google Scholar... all in one place.
All the latest content is available, no embargo periods.
“Whoa! It’s like Spotify but for academic articles.”@Phil_Robichaud