In 1990 in the United Kingdom, housing (and property) prices where had been
going up exponentially for some time. Mortgage laons at 0% down (with
insurance) were common. In mid-1990, a tax change substantially reduced the
mortgage interest deductibility for many two income families. Old loans had
some grandfathering, so there was a big push to complete sales before the tax
change. At the same time, the UK was one of the first countries to enter the
recession of the early 1990's. Result - housing prices nose dived immediately
after the tax change, and stayed down for several years, at the same time as
default rates skyrocketed due to the recession. Suddenly, there was a lot of
red ink in mortgage insurers results! In Canada at the same, the major
mortgage insurer competing with the government was forced to turn away new
business due to impairments of capital.
So at the very least, one should look at the results of mortgage insurers over
an economic cycle or two. Geographic diversification may help, but may not be
enough in today's correlated financial markets. Imagine the impact if Internal
Revenue changed the rules to limit tax deductibility of mortgage interest to
the first L100,000 of the mortgage - timed to take effect April 1, 1999, just
when we realize that Mr. Greenspan has overreacted in raising interest rates,
and is pushing us into a recession!
CJ Townsend
CUCAN, VP & Actuary
Visit the CAS Web Site at http://www.casact.org
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