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Abstract:
Evidence is shown, using US foreclosure data by state 1975-93, that periods of high default rates on home mortgages strongly tend to follow real estate price declines or interruptions in real estate price increase. The relation between price decline and foreclosure rates is modelled using a distributed lag. Using this model, holders of residential mortgage portfolios could hedge some of the risk of default by taking positions in futures or options markets for residential real estate prices, were such markets to be established.

Abstract:
Home equity insurance policies, policies insuring homeowners against declines in the price of their homes, would bear some resemblance both to ordinary insurance and to financial hedging vehicles. A menu of choices for the design of such policies is presented here, and conceptual issues are discussed. Choices include pass-through futures and options, in which the insurance company in effect serves as a retailer to homeowners of short positions in real estate futures markets or of put options on real estate. Another choice is a life-event-triggered insurance policy, in which the homeowner pays regular fixed insurance premia and is entitled to a claim if both there is a sufficient decline in the real estate price index and a specified life event (such as a move beyond a certain geographical distance) occurs. Pricing of the premia to cover loss experience is derived, and tables of break-even policy premia are shown, based on estimated models of Los Angeles housing prices 1971- 91.

Abstract:
The authors propose home equity insurance, insurance that protects homeowners against declines in the market value of their homes. Such insurance resembles both ordinary homeowners insurance and also financial hedging vehicles. One form of home equity insurance is pass-through futures and options, so that the insurance company acts as a retailer of short positions in traditional hedging vehicles. Another form is life-event-triggered insurance, that pays the homeonwer if there is a sufficient decline in real estate prices and if also a specified life event (such as a move beyond a certain geographical distance) occurs. The authors derive break-even insurance premia based on models of Los Angeles housing prices estimated with data from 1971-1991.

Abstract:
Home equity conversion as presently constituted or proposed usually does not deal well with the potential problem of moral hazard. Once home-owners 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.

Abstract:
A framework for comparing real estate valuation systems (including comparing purely statistical valuation systems with current appraisal methods) is proposed. The Density Estimation and Profit Simulation (DEPS) Method measures quality of a valuation system by simulating benefits to the mortgage lender who uses this method in mortgage underwriting to limit mortgage portfolio losses due to default. Related simple measures relevant to the selection of a valuation system are also discussed: skewness of the distribution of errors, correlation of valuation errors with current selling price errors, correlation of errors of the valuation system with errors of valuation systems used by competing mortgage lenders, and other measures.