Valuing Vulnerable Mortgage Insurance Under Capital Forbearance

Valuing Vulnerable Mortgage Insurance Under Capital Forbearance 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Real Estate Finance and Economics Springer Journals

Valuing Vulnerable Mortgage Insurance Under Capital Forbearance

Loading next page...
 
/lp/springer_journal/valuing-vulnerable-mortgage-insurance-under-capital-forbearance-0WIdgiy9RK
Publisher
Springer US
Copyright
Copyright © 2015 by Springer Science+Business Media New York
Subject
Economics; Regional/Spatial Science; Financial Services
ISSN
0895-5638
eISSN
1573-045X
D.O.I.
10.1007/s11146-015-9535-y
Publisher site
See Article on Publisher Site

Abstract

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.

Journal

The Journal of Real Estate Finance and EconomicsSpringer Journals

Published: Oct 5, 2015

References

You’re reading a free preview. Subscribe to read the entire article.


DeepDyve is your
personal research library

It’s your single place to instantly
discover and read the research
that matters to you.

Enjoy affordable access to
over 12 million articles from more than
10,000 peer-reviewed journals.

All for just $49/month

Explore the DeepDyve Library

Unlimited reading

Read as many articles as you need. Full articles with original layout, charts and figures. Read online, from anywhere.

Stay up to date

Keep up with your field with Personalized Recommendations and Follow Journals to get automatic updates.

Organize your research

It’s easy to organize your research with our built-in tools.

Your journals are on DeepDyve

Read from thousands of the leading scholarly journals from SpringerNature, Elsevier, Wiley-Blackwell, Oxford University Press and more.

All the latest content is available, no embargo periods.

See the journals in your area

DeepDyve Freelancer

DeepDyve Pro

Price
FREE
$49/month

$360/year
Save searches from Google Scholar, PubMed
Create lists to organize your research
Export lists, citations
Read DeepDyve articles
Abstract access only
Unlimited access to over
18 million full-text articles
Print
20 pages/month
PDF Discount
20% off