Hedging mortgage default risk with mortgage guaranty insurance: A model for Europe?

Mortgage Guaranty Insurance (MGI, also labeled "Private Mortgage Insurance" PMI) can help lenders and borrowers to cope with the default risk of mortgage credits. MGI is taken out by the debtor of a mortgage in favor of the lender. The insurance covers the loss risk of the creditor in case of a borrower's default. While MGI does not directly prevent defaults it protects the lenders and the economy from their often harmful consequences. This article characterizes the nature of the mortgage default risk. It gives an overview of the US mortgage insurance business. Special emphasis is placed on the risk/premium-differentiation policy of US mortgage insurers. Finally private mortgage insurance is compared with alternative instruments of mortgage credit risk management. The role of private mortgage insurance is to be a safety net for the tenders taking into account as many aspects of personal risk management as possible.