By Thorsten Koeppl, Queen’s University
The better way to use mortgage insurance is to use the existing system, but price the risks appropriately. There is currently no deductible on mortgage default losses, but the pricing of insurance does not fully consider the idiosyncratic default risk of the mortgage either. Risk-based premiums would increase the cost of the mortgages that add more risk to the housing system, since insurance costs for high risk mortgages are passed on by lenders to borrowers. Moreover, the government backstops mortgage insurers. A step in the right direction is to start charging a premium for this backstop to mortgage insurers up front, in order to pass on the potential cost of an extreme housing crisis to the mortgage industry. Notwithstanding, the premiums that are currently charged seem to grossly underestimate these costs.
Read the full post at the C.D. Howe Institute