Moral Hazard in Home Equity Conversion

Robert Shiller and Allan N. Weiss

No 1177, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: Home equity conversion as presently constituted or proposed usually does not deal well with the potential problem of moral hazard. Once homeowners know that the risk of poor market performance of their homes is borne by investors, they have an incentive to neglect to take steps to maintain the homes' values. They may thus create serious future losses for the investors. A calibrated model for assessing this moral hazard risk is presented that is suitable for a number of home equity conversion forms: 1) reverse mortgages, 2) home equity insurance, 3) shared appreciation mortgages, 4) housing partnerships, 5) shared equity mortgages and 6) sale of remainder interest. Modifications of these forms involving real estate price indices are proposed that might deal better with the problem of moral hazard.

Keywords: Reverse mortgages; home equity insurance; shared appreciation mortgages; housing partnerships; shared equity mortgages; sale of remainder interest; moral hazard; real estate price indices; home maintenance; home improvements (search for similar items in EconPapers)
Pages: 29 pages
Date: 1998-05
Note: CFP 1014.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Published in Real Estate Economics (2000), 28(1): 1-31

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