Moral Hazard in Home Equity Conversion

42 Pages Posted: 21 Jul 2000 Last revised: 29 May 2022

See all articles by Robert J. Shiller

Robert J. Shiller

Yale University - Cowles Foundation; National Bureau of Economic Research (NBER); Yale University - International Center for Finance

Allan N. Weiss

Case Shiller Weiss Inc.

Date Written: May 1998

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.

Suggested Citation

Shiller, Robert J. and Weiss, Allan N., Moral Hazard in Home Equity Conversion (May 1998). NBER Working Paper No. w6552, Available at SSRN: https://ssrn.com/abstract=226285

Robert J. Shiller (Contact Author)

Yale University - Cowles Foundation ( email )

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HOME PAGE: http://www.econ.yale.edu/~shiller/

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Yale University - International Center for Finance ( email )

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Allan N. Weiss

Case Shiller Weiss Inc. ( email )

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Cambridge, MA 02138
United States
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