There is no easy solution to the foreclosure crisis. There is not much that can be done in the system for people currently undergoing foreclosures (outside of existing programs) due to time lags and such. However, we can protect ourselves and our economic interests in the future by setting up a system to insure against defaulting on mortgage loans. Using actuarial concepts, we can methodically add a small premium to the new and existing mortgage payments of individuals in order to mitigate the possibility of a cataclysmic loss of an individual or lender.
There are many benefits to insuring mortgages. At a relatively low cost to the borrower, we can create a new profit-generating insurance industry which would protect lenders and mortgage holders. Although mortgage holders’ credit scores and associated costs are at risk, they do not have to worry about losing their home to repossession. The only risk that the lender faces is losing amount of the premium that the mortgage-holder should be paying. Should the mortgage-holder be unable to pay the mortgage, the lender does not have to repossess the house and hold it as a liability. It mitigates risks for both the lender and the borrower.
The premium charged to the individual will not be hard to determine. There is adequate data available on both the individual and historical mortgages to develop mathematical regressions models. These models would be based on variables such as credit score, age, occupation, time of year, current growth rate of the economy, current interest rates, unemployment rate, length of the mortgage, payment amount, total cost, risk of default, risk of total loss, and more, all factoring in the historical evidences. This model, which could be easily created using actuarial modeling software, could tell us the probability that an individual will default on his or her payment. This could be used to generate a personalized premium amount to add on to the mortgage payment of every individual. Should the individual default on the loan, the insuring entity receiving these premiums will make the payment for the individual, less the cost of the premium. The only loss to the lender is the amount of premium. The loss to the individual is having a higher premium and a lower credit score. The cost of the expected value of all the total losses is factored into the cost of everyone’s premium and should cover those delinquent cases. These individual’s credit scores and according interest rates will be affected, but their houses will still be their property and liability unless otherwise stated in the policy.
Unlike health or life insurance, not everyone defaults on a loan. Even in the current crisis, numbers are relatively low compared to those expected to seek medical help or receive a life insurance payout. The premiums will be fairly low, even for subprime recipients. Having actuarial experience, I can say that these premiums will be very low compared to the existing mortgage payments....