Home  Journals  Finance and Credit  41(617) - 2014 November

Credit risk insurance in mortgage lending and estimation factors of its influence

Available online: 3 November 2014

Subject Heading: Banking

JEL Classification: 

Pages: 43-56

A new insurance mechanism aimed at hedging the profile credit risk of a bank on the mortgage assets, i.e., mortgage insurance, has been operating in the Russian mortgage market since 2010. The article provides an overview of its global practice, considers the regulatory issues in Russia, position of this kind of insurance in the bank's risk management system, and also the regulatory impact on capital. It considers a number of constraining factors of mortgage insurance development, which can provide banks with lending opportunities to borrowers with a minimal down payment and with increased interest rate assumption of simultaneous risks insurance by the bank, not the borrower. The author shows that the mortgage loan is significantly different from other types of borrowing of individuals. The paper studies mortgage insurance as a tool in risk management system of the bank. In foreign practice, the insurer may require the creditor to prove that it has undertaken all the necessary measures to prevent default of borrower: by means of offering deferred payment, grace period, provided lowering of interest rate, etc. The author points out that the Russian practice yet does not meet such requirements, although their use could significantly lower an insurance cost, and remove the fears of borrowers to mortgage. At the same time, legal confirmation of the legal rules of the borrower on the binding right to restructuring in case of the deteriorating financial condition, the rating agencies consider rather from negative perspective. They consider priority in solving such issue in favor of the lender and the necessity of procedure of the borrower's repeating underwriting. The author describes in detail the insurance coverage mechanism, and also severe social consequences while preserving unsecured debt balance. The author demonstrates that insurance protection reliability can be improved through reinsurance.

Keywords: mortgage insurance, credit risk, regulatory capital, Basel II, reserve, ISFR

References:

1. Glossarii strakhovykh terminov, ispol'zuemykh pri provedenii strakhovykh operatsii [A glossary of insurance terms used in insurance operations]. Moscow, MFC Publ., 2008, 288 p.
2. Grishin P.A., Tsyganov A.A. Analiz faktorov effektivnosti bankostrakhovoi gruppy [An analysis of the effectiveness of a banking insurance group]. Finansy – Finance, 2007, no. 9, pp. 43–46.
3. Kopeikin A.B., Rogozhina N.N. Strakhovanie kreditnykh riskov pri ipotechnom zhilishchnom kreditovanii (strakhovanie ipotechnykh riskov) [Insurance of credit risks in residential mortgage lending (insurance of mortgage risks)]. Moscow, Fond Institut ekonomiki goroda Publ., 2005, 86 p.
4. RF Federal Law "On Introduction of amendments to the Law of the Russian Federation "On Organization of insurance business in the Russian Federation" of July 23, 2013 № 234-FZ. Available at: Link. (In Russ.)
5. Strakhovanie: uchebnik [Insurance: a textbook]. Moscow, Ekonomist" Publ., 2004, 875 p.
6. Strakhovka ot uravnilovki [Insurance against wage-levelling]. Rossiiskaya Gazeta, 2013, May 08. URL: Link. (In Russ.)
7. Tsyganov A.A., Yazykov A.D., Grishin P.A. Kanadskii opyt organizatsii sistemy ipotechnogo strakhovaniya [The Canadian experience of organization of the mortgage insurance system]. Strakhovoe delo – Insurance business, 2011, no. 5, pp. 44–50.
8. Tsyganov A.A., Yazykov A.D. Teoriya i praktika restrukturizatsii ipotechnykh kreditov v Rossii. Analiz deyatel'nosti OAO ARIZHK v 2009–2011 gg [Theory and practice of mortgage loans restructuring in Russia. The analysis of the OAO ARIZHK’s activities in 2009–2011]. Moscow, MAKSS Group Ltd. Publ., 2012, 346 p.
9. Shcherbakov V.A., Kostyaeva E.V. Strakhovanie: ucheb. posobie [Insurance: a textbook]. Moscow, KnoRus Publ., 2007, 312 p.
10. Yazykov A.D. Ipoteka i strakhovanie – optimal'nye formaty vzaimodeistviya [Mortgage and insurance as the best formats of interaction]. Available at: Link. (In Russ.)
11. Yazykov A.D. Strategiya banka po minimizatsii poter' v oblasti ipotechnogo zhilishchnogo kreditovaniya [A bank’s strategy to minimize losses in residential mortgage lending]. Finansy i kredit – Finance and credit, 2011, no. 44, pp. 37–46.

View all articles of issue

ISSN 2311-8709 (Online)
ISSN 2071-4688 (Print)

Journal current issue

Vol. 30, Iss. 4 April 2024

Archive