Structuring Mortgages for Macroeconomic Stability

John Campbell, Nuno Clara and João F. Cocco

No 27676, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study mortgage design features aimed at stabilizing the macroeconomy. We model overlapping generations of mortgage borrowers and an infinitely lived risk-averse representative mortgage lender. Mortgages are priced using an equilibrium pricing kernel derived from the lender's endogenous consumption. We consider an adjustable-rate mortgage (ARM) with an option that during recessions allows borrowers to pay only interest on their loan and extend its maturity. We find that this maturity extension option stabilizes consumption growth over the business cycle, shifts defaults to expansions, and is welfare enhancing. The cyclical properties of the maturity extension ARM are attractive to a risk-averse lender so the mortgage can be provided at a relatively low cost.

JEL-codes: E32 E52 G21 (search for similar items in EconPapers)
Date: 2020-08
New Economics Papers: this item is included in nep-ban, nep-dge, nep-mac and nep-ure
Note: AP ME
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Citations: View citations in EconPapers (6)

Published as John Y. Campbell & Nuno Clara & João F. Cocco, 2021. "Structuring Mortgages for Macroeconomic Stability," Journal of Finance, American Finance Association, vol. 76(5), pages 2525-2576, October.
Published as JOHN Y. CAMPBELL & NUNO CLARA & JOÃO F. COCCO, 2021. "Structuring Mortgages for Macroeconomic Stability," The Journal of Finance, vol 76(5), pages 2525-2576.

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