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

Shared appreciation mortgages (SAMs) are mortgages in which the lender shares some of the home appreciation with the borrower, but does not share in any possible home depreciation. The new Bank of Scotland SAMs are an example. In these, the homeowner receives an interest-free or low-rate loan with no repayment date, in exchange for turning over a fraction of the appreciation of the home from the time of application at the time of sale or death. (The homeowner does not receive money from the lender if the appreciation is negative.) In the Bank of Scotland interest-free version, one pays no interest at all, but turns over as much as 75% of the appreciation of the home.

Housing market partnerships are partnership contracts involving the homeowner and another investor in which the investor is the limited partner, the homeowner the managing partner. Caplin, Chan, Freeman and Tracy (1997) have been advocating these for the United States. Since the investor is the limited partner, the investor has no personal liability from ownership of the property, and so limited partnerships can be readily sold, even securitized.