Structuring Mortgages for Macroeconomic Stability

John Campbell, Nuno Clara and João F. Cocco

Journal of Finance, 2021, vol. 76, issue 5, 2525-2576

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

Date: 2021
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Citations: View citations in EconPapers (12)

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https://doi.org/10.1111/jofi.13056

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Working Paper: Structuring Mortgages for Macroeconomic Stability (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:76:y:2021:i:5:p:2525-2576

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