NBER

Neil Bhutta

Federal Reserve Board
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Institutional Affiliation: Federal Reserve Board

NBER Working Papers and Publications

July 2018Eyes Wide Shut? The Moral Hazard of Mortgage Insurers during the Housing Boom
with Benjamin J. Keys: w24844
In the U.S. mortgage market, private mortgage insurance (PMI) is mandated for high-leverage mortgages purchased by Fannie Mae and Freddie Mac to serve as a private market check on GSE risk-taking. However, we document that PMI firms dramatically expanded insurance on high-risk mortgages at the tail-end of the housing boom, contradicting the industry's own research regarding house price risk. Using three detailed sources of mortgage and insurance data, we examine PMI application denial rates, default rates on PMI-backed loans, and growth rates of high-leverage lending around the GSE conforming loan limit, along with information extracted from company, industry and regulatory filings and reports. We conclude that PMI behavior during the housing boom in part reflects a "moral hazard" incenti...

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