Is additional indebtedness the way to increase mortgagedefault insurance coverage?

The Dutch Parliament unanimously adopted a motion to ask the Minister of the Interior to increase the maximum loan-to-value (LTV) ratio for home buyers who apply for mortgage-default insurance (NHG). The reason for this motion is that the share of mortgages with such insurance is rapidly declining among first-time home buyers. In this paper, we first examine whether the reduction in the NHG market share is due to the lower LTV caps. Next, we analyze whether relaxing the LTV cap for NHG, in effect raising it to over 100%, can constitute an incentive to moral hazard, where (married) couples choose to divorce rather than carry residual debt.
Our analysis shows that two factors are responsible for the drop in market share. First, the price increase in the housing market in combination with the reduction of the price threshold for NHG qualification has led to reduced eligibility for mortgagedefault insurance. Second, the interest rate reduction for NHG loans, which was an important incentive to acquire NHG insurance, has nearly disappeared. Our study also shows that the chance to strategically seek divorce has increased the hazard rate into divorce by 31%. Connected to this, we show a number of negative externalities that could arise when divorces increase, including worsening of the pension position.