Eyes Wide Shut? The Moral Hazard of Mortgage Insurers during the Housing Boom / Neil Bhutta, Benjamin J. Keys.

Format:

Book

Author/Creator:

Bhutta, Neil.

Contributor:

National Bureau of Economic Research.

Keys, Benjamin J.

Series:

Working Paper Series (National Bureau of Economic Research) no. w24844.

NBER working paper series no. w24844

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2018.

Summary:

In the U.S. mortgage market, private mortgage insurance (PMI) is mandated for high-leverage mortgages purchased by Fannie Mae and Freddie Mac to serve as a private market check on GSE risk-taking. However, we document that PMI firms dramatically expanded insurance on high-risk mortgages at the tail-end of the housing boom, contradicting the industry's own research regarding house price risk. Using three detailed sources of mortgage and insurance data, we examine PMI application denial rates, default rates on PMI-backed loans, and growth rates of high-leverage lending around the GSE conforming loan limit, along with information extracted from company, industry and regulatory filings and reports. We conclude that PMI behavior during the housing boom in part reflects a "moral hazard" incentive inherent to insurance companies in general to underprice risk and be undercapitalized. Our results suggest that rather than providing discipline, private mortgage insurers facilitated GSE risk-taking.

Notes:

Print version record

July 2018.