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Who benefits the most? Risk pooling in mortgage loan insurance: Evidence from the Canadian mortgage market

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  • Kiana Basiri
  • Babak Mahmoudi
  • Chenggang Zhou

Abstract

This article evaluates the effect of mortgage loan insurance (MLI), an essential macroprudential tool available to policy makers, on housing affordability, household leverage, and the overall welfare of the economy. A dynamic model of the housing market with heterogeneous households and competitive housing and mortgage markets is constructed and is calibrated to Canadian data. We find that relaxing the mandatory nature of MLI required for mortgages with a loan‐to‐value ratio of 80% or more, in favor of a counterfactual system where MLI reflects credit risks, dampens demand for housing to purchase and puts downward pressure on house prices. Some of the households with low income and low asset holdings can no longer afford a house; therefore, the aggregate homeownership rate drops. In contrast, demand for rental units increases and rents go up.

Suggested Citation

  • Kiana Basiri & Babak Mahmoudi & Chenggang Zhou, 2023. "Who benefits the most? Risk pooling in mortgage loan insurance: Evidence from the Canadian mortgage market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 51(2), pages 311-337, March.
    • Handle: RePEc:bla:reesec:v:51:y:2023:i:2:p:311-337
    DOI: 10.1111/1540-6229.12405
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    References listed on IDEAS

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