UNEMPLOYMENT-INSURANCE AND MORTGAGES

We consider mortgages including the possibility of an unemployment ins urance. The insurance company pays the cash flows of the credit as soo n as the borrower becomes unemployed, for a maximal number of payments fixed in the contract. We develop a probabilistic model for describin g the cash flows paid by the insurance company. We jointly take into a ccount unemployment, job search and prepayment phenomena. With such a model it is possible to study the probabilistic properties of the cash flow pattern as a function of the age of the credit. Finally, we disc uss the estimation of the parameters of such a model and its use for p ricing the insurance contract. (C) 1997 Elsevier Science B.V.