Moral Hazard in Home Equity Conversion

Home equity conversion as presently constituted or proposed usually does not deal well with the potential problem of moral hazard. Once homeowners know that the risk of poor market performance of their homes is borne by investors, they have an incentive to neglect to take steps to maintain the homes' values. They may thus create serious future losses for the investors. A calibrated model for assessing this moral hazard risk is presented that is suitable for a number of home equity conversion forms: 1) reverse mortgages, 2) home equity insurance, 3) shared appreciation mortgages, 4) housing partnerships, 5) shared equity mortgages and 6) sale of remainder interest. Modifications of these forms involving real estate price indices are proposed that might deal better with the problem of moral hazard.Reverse mortgages, home equity insurance, shared appreciation mortgages, housing partnerships, shared equity mortgages, sale of remainder interest, moral hazard, real estate price indices, home maintenance, home improvements

Home Equity Insurance

Home equity insurance policies, policies insuring homeowners against declines in the price of their homes, would bear some resemblance both to ordinary insurance and to financial hedging vehicles. A menu of choices for the design of such policies is presented here, and conceptual issues are discussed. Choices include pass-through futures and options, in which the insurance company in effect serves as a retailer to homeowners of short positions in real estate futures markets or of put options on real estate. Another choice is a life-event-triggered insurance policy, in which the homeowner pays regular fixed insurance premia and is entitled to a claim if both there is a sufficient decline in the real estate price index and a specified life event (such as a move beyond a certain geographical distance) occurs. Pricing of the premia to cover loss experience is derived, and tables of break-even policy premia are shown, based on estimated models of Los Angeles housing prices 1971- 91.

Magnetic buoyancy instabilities in the presence of magnetic flux pumping at the base of the solar convection zone

We perform idealized numerical simulations of magnetic buoyancy instabilities in three dimensions, solving the equations of compressible magnetohydrodynamics in a model of the solar tachocline. In particular, we study the effects of including a highly simplified model of magnetic flux pumping in an upper layer (‘the convection zone’) on magnetic buoyancy instabilities in a lower layer (‘the upper parts of the radiative interior – including the tachocline’), to study these competing flux transport mechanisms at the base of the convection zone. The results of the inclusion of this effect in numerical simulations of the buoyancy instability of both a preconceived magnetic slab and a shear-generated magnetic layer are presented. In the former, we find that if we are in the regime that the downward pumping velocity is comparable with the Alfvén speed of the magnetic layer, magnetic flux pumping is able to hold back the bulk of the magnetic field, with only small pockets of strong field able to rise into the upper layer. In simulations in which the magnetic layer is generated by shear, we find that the shear velocity is not necessarily required to exceed that of the pumping (therefore the kinetic energy of the shear is not required to exceed that of the overlying convection) for strong localized pockets of magnetic field to be produced which can rise into the upper layer. This is because magnetic flux pumping acts to store the field below the interface, allowing it to be amplified both by the shear and by vortical fluid motions, until pockets of field can achieve sufficient strength to rise into the upper layer. In addition, we find that the interface between the two layers is a natural location for the production of strong vertical gradients in the magnetic field. If these gradients are sufficiently strong to allow the development of magnetic buoyancy instabilities, strong shear is not necessarily required to drive them (cf. previous work by Vasil & Brummell). We find that the addition of magnetic flux pumping appears to be able to assist shear-driven magnetic buoyancy in producing strong flux concentrations that can rise up into the convection zone from the radiative interior

Ground state energy of a homogeneous Bose-Einstein condensate beyond Bogoliubov

The standard calculations of the ground-state energy of a homogeneous Bose gas rely on approximations which are physically reasonable but difficult to control. Lieb and Yngvason [Phys. Rev. Lett. 80, 2504 (1998)] have proved rigorously that the commonly accepted leading order term of the ground state energy is correct in the zero-density-limit. Here, strong indications are given that also the next to leading term is correct. It is shown that the first terms obtained in a perturbative treatment provide contributions which are lost in the Bogoliubov approach.Comment: 6 pages, accepted for publication in Europhys. Lett. http://www.epletters.ch

Further explorations of Skyrme-Hartree-Fock-Bogoliubov mass formulas. XI: Stabilizing neutron stars against a ferromagnetic collapse

We construct a new Hartree-Fock-Bogoliubov (HFB) mass model, labeled HFB-18, with a generalized Skyrme force. The additional terms that we have introduced into the force are density-dependent generalizations of the usual $t_1$ and $t_2$ terms, and are chosen in such a way as to avoid the high-density ferromagnetic instability of neutron stars that is a general feature of conventional Skyrme forces, and in particular of the Skyrme forces underlying all the HFB mass models that we have developed in the past. The remaining parameters of the model are then fitted to essentially all the available mass data, an rms deviation $\sigma$ of 0.585 MeV being obtained. The new model thus gives almost as good a mass fit as our best-fit model HFB-17 ($\sigma$ = 0.581 MeV), and has the advantage of avoiding the ferromagnetic collapse of neutron stars.Comment: accepted for publication in Physical Review

The Coexistence of Multiple Distributions Systems for Financial Services: The Case of Property-Liability Insurance

Property-liability insurance is distributed by two different types of firms, those that distribute their product through independent agents, who represent more than one insurer,and direct writing insurers that distribute insurance through exclusive agents, who represent only one insurer. This paper analyzes the reasons for the long term coexistence of the independent agency and direct writing distribution systems. Two primary hypotheses explain the coexistence of independent and exclusive agents. The market imperfections hypothesis suggests that firms that use independent agents survive while providing essentially the same service as firms using exclusive agents because of market imperfections such as price regulation, slow diffusion of information in insurance markets, or search costs that permit inefficient firms to survive alongside efficient firms. Efficient firms are expected to earn super-normal risk-adjusted profits, while inefficient firms will earn risk-adjusted profits closer to normal levels. The product quality hypothesis suggests that higher costs of independent agents represent unobserved differences in product quality or service intensity, such as the providing of additional customer assistance with claims settlement,offering a greater variety of product choice sand reducing policyholder search costs. This hypothesis predicts normal risk-adjusted profits for both independent and exclusive agency firms. Because product quality in insurance is essentially unobserved, researchers have been unable to reach consensus on whether the market imperfections hypothesis or the product quality hypothesis is more consistent with the observed cost data. This lack of consensus leaves open the economic question of whether the market works well in solving the problem of minimizing product distribution costs and leaves unresolved the policy issue of whether marketing costs in property-liability insurance are excessive and perhaps should receive regulatory attention. The authors propose a new methodology for distinguishing between market imperfection sand product quality using frontier efficiency methods. They estimate both profit efficiency and cost efficiency for a sample of independent and exclusive agency insurers. Measuring profit efficiency helps to identify unobserved product quality differences because customers should be willing to pay extra for higher quality. This approach allows for the possibility that some firms may incur additional costs providing superior service and be compensated for these costs through higher revenues. Profit efficiency also implicitly incorporates the qualities floss control and risk management services,since insurers that more effectively control losses and manage risk should have higher average risk-adjusted profits but not necessarily lower costs than less effective insurers. The empirical results confirm that independent agency firms have higher costs on average than do direct writers. The principal finding of the study is that most of the average differential between the two groups of firms disappears in the profit function analysis. This is a robust result that holds both in the authors tables of averages and in the regression analysis and applies to both the standard and non-standard profit functions. Based on averages, the profit efficiency differential is at most one-third as large as the profit efficiency differential.Based on the regression analysis, the profit inefficiency differential is at most one-fourth as large as the cost inefficiency differential,and the profit inefficiency differential is not statistically significant in the more fully specified models that control for size,organizational form and business mix. The results provide strong support for the product quality hypothesis and do not support the market imperfections hypothesis. The higher costs of independent agents appear to be due almost entirely to the provision of higher quality services, which are compensated for by additional revenues. A significant public policy implication is that regulatory decisions should not be based on costs alone. The authors findings imply that marketing cost differentials among insurers are mostly attributable to service differentials rather than to inefficiency and therefore do not represent social costs. The profit inefficiency results show that there is room for improvement in both the independent and direct writing segments of the industry. However, facilitating competition is likely to be a more effective approach to increasing efficiency than restrictive price regulation.

Mortgage Default Risk and Real Estate Prices: The Use of Index-Based Futures and Options in Real Estate

Evidence is shown, using US foreclosure data by state 1975-93, that periods of high default rates on home mortgages strongly tend to follow real estate price declines or interruptions in real estate price increase. The relation between price decline and foreclosure rates is modelled using a distributed lag. Using this model, holders of residential mortgage portfolios could hedge some of the risk of default by taking positions in futures or options markets for residential real estate prices, were such markets to be established.

Convective intensification of magnetic fields in the quiet Sun

Kilogauss-strength magnetic fields are often observed in intergranular lanes at the photosphere in the quiet Sun. Such fields are stronger than the equipartition field B_e, corresponding to a magnetic energy density that matches the kinetic energy density of photospheric convection, and comparable with the field B_p that exerts a magnetic pressure equal to the ambient gas pressure. We present an idealised numerical model of three-dimensional compressible magnetoconvection at the photosphere, for a range of values of the magnetic Reynolds number. In the absence of a magnetic field, the convection is highly supercritical and is characterised by a pattern of vigorous, time-dependent, “granular” motions. When a weak magnetic field is imposed upon the convection, magnetic flux is swept into the convective downflows where it forms localised concentrations. Unless this process is significantly inhibited by magnetic diffusion, the resulting fields are often much greater than B_e, and the high magnetic pressure in these flux elements leads to their being partially evacuated. Some of these flux elements contain ultra-intense magnetic fields that are significantly greater than B_p. Such fields are contained by a combination of the thermal pressure of the gas and the dynamic pressure of the convective motion, and they are constantly evolving. These ultra-intense fields develop owing to nonlinear interactions between magnetic fields and convection; they cannot be explained in terms of “convective collapse” within a thin flux tube that remains in overall pressure equilibrium with its surroundings