Does Skin-In-The-Game Discipline Risk Management? Evidence from Mortgage Insurance

59 Pages Posted: 9 Oct 2017

See all articles by Haoyang Liu

Haoyang Liu

affiliation not provided to SSRN

Date Written: October 8, 2017


Many mortgage reform proposals suggest replacing Fannie Mae and Freddie Mac (the GSEs) with private entities. A common assumption underlying these proposals is that unlike the GSEs, private insurers will properly manage risk and set fair prices. Inconsistent with this assumption, this paper presents evidence that private insurers less effectively managed home price risks during the 2000-2006 housing boom than the GSEs did. Mortgage origination data reveal that the GSEs were selecting loans with increasingly higher percentages of down payments, or lower loan to value ratios (LTVs), in boom areas than in other areas. These lower LTVs in boom areas reduced the GSEs’ exposure to overheated markets. Furthermore, the decline of LTVs in boom areas stems entirely from the segment insured by the GSEs only, and none of the decline stems from the segment where private mortgage insurers take the first loss position. Private insurers also did not lower their exposure to home price risks along other dimensions, including the percentage of high LTV GSE loans they insured and the percentage of insured mortgage balance. My results highlight that post-crisis reform of the mortgage insurance industry should carefully consider additional factors besides moral hazard induced by the government guarantees, such as mortgage insurers’ future home price assumptions and the industry organization of the mortgage origination chain.

Keywords: Risk Management, Private Mortgage Insurance Companies, Fannie Mae and Freddie Mac, Home Price Risk, Macroprudential Policies

JEL Classification: G01, G28

Suggested Citation

Liu, Haoyang, Does Skin-In-The-Game Discipline Risk Management? Evidence from Mortgage Insurance (October 8, 2017). Available at SSRN: or

Haoyang Liu (Contact Author)

affiliation not provided to SSRN

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