MORAL HAZARD IN HOME EQUITY CONVERSION: Maintenance of Home 2

The contract might have provisions that an appraiser inspects the maintenance, and the homeowner is penalized if maintenance is inadequate. Such provisions might go part way, but not fully, to solving the problem. For clear-cut tasks like fixing the roof when it has a hole in it, the appraiser can evaluate easily whether the homeowner is complying properly. But, there is a vast gray area in most maintenance. Is it time to replace the entire roof, and not just fix the hole? Is it time to replace the kitchen stove? Is it time to remove slightly fading wallpaper? <
Should the homeowner have the old in-ground swimming pool removed and relandscape the yard? Even if most people will agree that these changes would be value-increasing, it will be largely impossible prove this well enough to exact penalties from homeowners for failing to do these things. Of course, one might ask the appraiser not to pass on the individual improvements, but to just give an estimate of the value of the home. But these appraisals of the real value of a home are subject to substantial errors, 10%, 20% or even more are common, so that the effects of maintenance will be easily lost in the noise. Also, there will be agency problems in getting appraisers to give unbiased appraisals when they know that their appraisal feeds directly into a penalty for the homeowner. Moreover, imposing penalties against homeowners for ambiguously defined noncompliance is an expensive proposition: dealing with litigation and other homeowner resistance are likely expenses. They would have to expect to impose penalties on a high proportion of homeowners if the penalties are to be effective.