Rationales of Mortgage Insurance Premium Structures

Barry Dennis, Chionglong Kuo and Tyler Yang
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Barry Dennis: Price Waterhouse LLP 1616 N. Fort Myer Drive Arlington, Virginia 22209, http://www.pwcglobal.com/gx/eng/main/home/
Chionglong Kuo: Price Waterhouse LLP 1616 N. Fort Myer Drive Arlington, Virginia 22209, http://www.pwcglobal.com/gx/eng/main/home/
Tyler Yang: Price Waterhouse LLP 1616 N. Fort Myer Drive Arlington, Virginia 22209, http://www.pwcglobal.com/gx/eng/main/home/

Journal of Real Estate Research, 1997, vol. 14, issue 3, pages 359-378

Abstract: 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.

JEL-codes: L85 (search for similar items in EconPapers)
Date: 1997
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