Residual-debt insurance and mortgage repayments

Yeorim Kim and Mauro Mastrogiacomo

Working Papers from DNB

Abstract: Mortgagors insured against negative home equity are less likely to partially prepay their mortgage debt compared to those without the insurance. We identify the effect of insurance on prepayments combining two strategies. First we use a regression discontinuity design, enabled by the acceptance criteria of the Dutch insurance which is only accessible for houses below a legislated threshold. After that we add information on (unexpected) intergenerational transfers to the borrowers. We find that insured borrowers make 22.8% lower prepayments relative to their original debt, and we propose that this could be explained by moral hazard. As this insurance was an ‘offer you cannot refuse’, this is a more likely explanation than adverse selection.

Keywords: moral hazard; mortgage insurance; mortgage prepayment (search for similar items in EconPapers)
JEL-codes: D14 G21 G51 (search for similar items in EconPapers)
Date: 2024-12
New Economics Papers: this item is included in nep-ure
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