Pricing FHA Mortgage Default Insurance

33 Pages Posted: 25 Jun 2004 Last revised: 12 Apr 2021

See all articles by Donald F. Cunningham

Donald F. Cunningham

Baylor University - Department of Finance, Insurance & Real Estate; National Bureau of Economic Research (NBER)

Patric H. Hendershott

University of Aberdeen - Centre for Property Research; National Bureau of Economic Research (NBER)

Date Written: June 1984

Abstract

The fair premia on FHA mortgage default insurance contracts are computed under alternative assumptions regarding the expected house price inflation rate and its variance and homeowner's default costs. The contracts considered vary by amortization schedule (15 and 30 year level-payment mortgages and two graduated-payment mortgages) and initial loan-to-value ratio (80 to 95.8percent) .The results indicate a wide variation in fair insurance premia. Because FHA charges all borrowers the same premia, large cross-subsidies exist within the program, with borrower's obtaining low loan-to-value or rapidly amortizing loans subsidizing borrowers with high loan-to-value or negative amortizing loans. Moreover, the movement toward insuring riskier loans --graduated payment, price-level adjusted and adjustable rate -- without increasing insurance premia seems almost certain to lead to significant overall losses for the program.

Suggested Citation

Cunningham, Donald F. and Hendershott, Patric H., Pricing FHA Mortgage Default Insurance (June 1984). NBER Working Paper No. w1382, Available at SSRN: https://ssrn.com/abstract=227146

Donald F. Cunningham (Contact Author)

Baylor University - Department of Finance, Insurance & Real Estate ( email )

P.O. Box 98004
Waco, TX 76798-8004
United States
(817)755-1092 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Patric H. Hendershott

University of Aberdeen - Centre for Property Research ( email )

Aberdeen AB24 2UF
Scotland

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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