Speaker: ZHANG Yunqi, Ph.D. candidate, National University of Singapore
Host: Fu Shihe, Associate Professor, RIEM
Time: 10:00-11:30am, July 10, Thursday
Venue: 305 RIEM Office Building, Guanghua Campus
Abstract:
This paper studies the effects of debt insurance on the likelihood of debt renegotiation with the setting of mortgages. Mortgage insurance enables mortgage holders to potentially get compensation for the loss in mortgage investment resulting from borrower’s default and subsequent liquidation. If a mortgage loan becomes delinquent, the borrower may apply for mortgage modification. According to moral hazard theory, mortgage holders are less likely to accept mortgage modification if mortgages are guaranteed by mortgage insurance, because their loss can be paid by the insurance company. We empirically test this effect using datasets including detailed information of mortgage origination and performance. We find that higher insurance coverage leads to lower likelihood of modification and the magnitude of this moral hazard effect is significant. This paper is the first to test the role of debt insurance in debt renegotiation, not only in mortgage literature but also in general finance literature. It helps us better understand mortgage holders’ reluctance to modify mortgage loans, an important factor of the higher liquidation rate in the financial crisis.
About the speaker:
Zhang Yunqi obtained a BA. Degree in finance from SWUFE (School of Finance) in 2010. He is now a Ph.D. candidate in the Department of Real Estate at National University of Singapore. His research interest focuses on Real Estate Finance, Household Finance, Housing Market, Financial Institutions.
