Continuous Workout Mortgages

Robert Shiller, Rafal Wojakowski, M. Shahid Ebrahim () and Mark Shackleton

No 1794, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: This paper models Continuous Workout Mortgages (CWMs) in an economic environment with refinancings and prepayments by employing a market-observable variable such as the house price index of the pertaining locality. Our main results include: (a) explicit modelling of repayment and interest-only CWMs; (b) closed form formulae for mortgage payment and mortgage balance of a repayment CWM; (c) a closed form formula for the actuarially fair mortgage rate of an interest-only CWM. For repayment CWMs we extend our analysis to include two negotiable parameters: adjustable "workout proportion" and adjustable "workout threshold." These results are of importance as they not only help understanding the mechanics of CWMs and estimating key contract parameters. These results are of importance as they not only help in the understanding of the mechanics of CWMs and estimating key contract parameters, but they also provide guidance on how to enhance the resilience of the financial architecture and mitigate systemic risk.

Keywords: Continuous Workout Mortgage (CWM); Repayment; Interest-only; House price index; Prepayment intensity; Cap and floor on continuous flow (search for similar items in EconPapers)
JEL-codes: C63 D11 D14 D92 G13 G21 R31 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2011-04
New Economics Papers: this item is included in nep-rmg and nep-ure
References: View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Working Paper: Continuous Workout Mortgages (2011)
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