MORAL HAZARD IN HOME EQUITY CONVERSION: Introduction 5

We believe that many of these contracts that base settlements exclusively on the selling price of the homes are likely to reveal in many cases, at a later date, serious costs for the lender, costs that might have been avoided if the contracts had been written differently. With reverse mortgages, the contract could be restructured so that the homeowner maintains an interest in the home at all times, by rewarding/penalizing for departures of home price from the index value. With home equity insurance, the policy can be settled in terms of an index. With shared appreciation mortgages, the contract should be settled, at least in part, on a real estate price index for the region and housing type, rather than just on the selling price of the home. For housing market partnerships, the partnership contract should have special provisions so that the occupant of the home, the limited partner, benefits if the selling price of the home on sale is high relative to the selling price predicted by an index.
Keep Reading →

MORAL HAZARD IN HOME EQUITY CONVERSION: Introduction 4

Gavel_and_dollars
Shared Equity Mortgages (SEMs) are similar in effect to the housing partnerships. SEMs are occasionally arranged among family members and sometimes with outside investors. With SEMs, there are three parties to the mortgage contract, the homeowner, an investor, and a mortgage lender. In effect, both the homeowner and the investor buy shares in the home. In some cases the investor and mortgage lender may be the same.

Sale of remainder interest is a pure sale of the home (or portion thereof) to investors who will acquire the (share of the) home after the owner dies or moves out of the home, until which time the owner has a contract allowing him or her to occupy the home. With the Lifetime Security Plan in California, see Goren et al. (1996), sale of remainder is marketed to elderly homeowners who are in need of income. In this sale of remainder interest contract, the homeowner agrees to turn over basic maintenance of the home to the plan sponsors, thus reducing the moral hazard problem.
Keep Reading →

MORAL HAZARD IN HOME EQUITY CONVERSION: Introduction 3

Home equity insurance is a policy that insures the price of a home on resale. We have proposed various forms of home equity insurance, see Shiller and Weiss (1994). The insurance might be a stand-alone insurance policy that a homeowner may buy at any time, or, more plausibly, it would be an add-on to the homeowners insurance policy or mortgage policy. In some forms, home equity insurance may be essentially a sort of option, a put, on the home. In its simplest form, the policy could be settled on the actual sales price of the home, or, alternatively, as we proposed it, it could be settled on an index of home prices. Today there is not, and never has been as far as we know, any home equity insurance program, but some insurance companies have expressed some interest in our proposals, and we believe that home equity insurance may be a real possibility in the not too distant future. Here
Keep Reading →

MORAL HAZARD IN HOME EQUITY CONVERSION: Introduction 2

Reverse mortgages are contracts providing regular payments and/or a lump sum to the homeowner, the debt to be repaid only when the home is sold, the owner no longer lives in the home, or the owner dies. They are the “reverse” of conventional mortgages in the sense that, for many of them, the homeowner receives a monthly payment from the mortgage lender rather than makes a monthly payment to the bank, but their essential feature for us is that they involve some partial home price risk sharing for the homeowner. These reverse mortgages involve partial risk sharing for the homeowner because if the loan balance turns out to be greater than the value of the home when it is sold, the homeowner need not pay the difference. Reverse mortgages are loans against home equity only; they are subject to a non-recourse limit. They differ fundamentally from conventional mortgages or home equity loans for which loan applicants are required to show proof of income, and where the home is technically collateral. With reverse mortgages, no proof of income or wealth beyond the home is required, because the mortgagee has no claim on these.
Keep Reading →

MORAL HAZARD IN HOME EQUITY CONVERSION: Introduction

pm_01064131
Many of the forms of home equity conversion, both those forms that have already been implemented in some places and those that are just in the proposal stage, may result in some serious future losses for the investors. Participating homeowners may fail to take steps to maintain the value of their homes once they know that others are bearing some of the risk of poor home resale value. The risk of such future problems with home equity conversion might be reduced if the contracts are redesigned so that the settlements in the contracts are determined by real estate price indices, rather than in terms of the sale price of the home itself.
Keep Reading →

MEDICARE FROM THE PERSPECTIVE OF GENERATIONAL ACCOUNTING: Conclusion

fiscal policy

Recent U.S. policy changes and more optimistic fiscal forecasts have significantly improved the long-term fiscal prospects of the country. Nevertheless, these prospects remain dismal. Unless U.S. fiscal policy changes by a lot and very soon, our descendants will face rates of lifetime net taxation that are 70 percent higher than those we now face. They will, on average, find themselves paying 1 of every 2 dollars they earn to a local, state, or federal government in net taxes.

Keep Reading →

MEDICARE FROM THE PERSPECTIVE OF GENERATIONAL ACCOUNTING: Achieving Generational Balance Via Medicare Cuts 2

The table shows the requisite permanent percentage cut in Medicare benefits needed to achieve generational balance given the policy in place and the start date for the cut. It also shows the absolute Medicare spending cut in billions of 1995 dollars in the first year the policy is initiated. Finally, the table shows the common lifetime net tax rate that will face future and newborn generations once the specified policy is enacted.

Keep Reading →

MEDICARE FROM THE PERSPECTIVE OF GENERATIONAL ACCOUNTING: Achieving Generational Balance Via Medicare Cuts

Table 4 examines the permanent cuts in Medicare benefits that could be used to achieve generational balance by which we mean equalizing the lifetime net tax rates of current newborns and future generations. The table considers baseline (current) policy as well as three other policies: a) limiting government purchases after the turn of the century to the same real amount as that spent in 2000, b) reducing the annual growth rate of Medicare and Medicaid expenditures by 2 percentage points between now and 2003 and permitting real expenditures per beneficiary on these programs to grow after 2003 at the growth rate of labor productivity, and c) simultaneously engaging in policies a) and b). itat on

Keep Reading →

MEDICARE FROM THE PERSPECTIVE OF GENERATIONAL ACCOUNTING: Cutting Medicare Benefits

Cutting Medicare Benefits to Achieve Generational Balance

Although the imbalance in U.S. generational policy is quite large, it is substantially smaller than it was a couple of years ago. The improvement in the U.S. generational imbalance can be traced to changes in policy that have led to revised fiscal projections and changes in the fiscal projections of the same policies.

Keep Reading →

MEDICARE FROM THE PERSPECTIVE OF GENERATIONAL ACCOUNTING: Comparing U.S. Generational Accounts 3

imbalancejpg_20140305142524285

The sources of generational imbalance in the various countries differ across the countries. In Japan, the scaled generational accounts of both the young and the old substantially exceed those of young and old Americans. For example, 40-year-olds face remaining lifetime net taxes of $101,300 in the U.S., but $322,100 in Japan! And 70-year-olds Americans can expect to receive $104,600 in net transfers over the rest of their lives compared with only $54,700 for comparably aged Japanese. These findings would, other things equal, suggest a smaller generational imbalance in Japan than in the U.S. But other things aren’t equal. The Japanese generational imbalance is greater than that of the U.S., in part, because of its level of projected government purchases and, in part, because of its demographics. Japan is aging more rapidly and more significantly than is the U.S. In the U.S. today, there are close to 19 elderly for every 100 workers. In 2030, there will be 37 elderly for every 100 workers. In Japan today, there are only about 17 elderly per 100 workers, and in 2030, there will be 45 elderly per 100 workers.

Keep Reading →

Pages: 1 2 Next