A Theoretic Analysis of Extent of Lender Participation in a Participating Mortgage

Jaime Alvayay, Charles Harter and Wm. Smith ()

Review of Quantitative Finance and Accounting, 2005, vol. 25, issue 4, 383-411

Abstract: A participating mortgage is a loan in which a lender accepts a below-market coupon rate in return for a share (participation) in the cash flows generated by income-producing real property. The cash flows provided by participation are classified as contingent interest and are intended to compensate the lender for additional risk exposure as well as the reduction in coupon rate. In this paper, we present a partial equilibrium wealth-maximizing model to estimate the extent of lender participation and an analysis of the factors affecting it. The results of formal comparative statics analysis show that the lender's percentage participation is, in general, positively related to changes in the loan-to-value ratio and threshold cash flows above which participation is payable. Among yet other results, a change in the contracted loan life has an ambiguous effect on the lender's percentage participation. Then, in an effort to resolve ambiguities in the comparative statics results, we employ a numerical procedure in conducting sensitivity analyses. This allows us to estimate percentage participation levels, and their elasticities, under various assumptions regarding the underlying factors. Copyright Springer Science + Business Media, Inc. 2005

Keywords: participation; wealth-maximizing; partial equilibrium; elasticity; contingent interest; comparative statics; numerical procedure (search for similar items in EconPapers)
Date: 2005
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DOI: 10.1007/s11156-005-5461-z

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