Reducing the impact of real estate foreclosures with Amortizing Participation Mortgages

Rafal M. Wojakowski, M. Shahid Ebrahim and Mark Shackleton

Journal of Banking & Finance, 2016, vol. 71, issue C, 62-74

Abstract: We employ Amortizing Participation Mortgage (APM) to offer a novel ex post renegotiation method of a foreclosure. APM belongs to the family of home loan credit facilities advocated in the Dodd–Frank Wall Street Reform and Consumer Protection Act 2010. In our framework, APMs reduce the endemic agency costs of debt by improving affordability. These benefits increase the demand for real estate in bust times and reduce fragility of the financial system thereby preventing foreclosures. We evaluate APMs in a stochastic control framework and provide solutions for an optimal amortization schedule. We generalize our approach to partially amortizing and commercial mortgages which encompass balloon payments. Finally, we provide concrete numerical examples of home loan modifications. We also offer detailed sensitivity analysis to market parameters such as house price volatility and interest rates.

Keywords: Dodd–Frank Act; Home loan modification; Prepayment; Default; Partial amortization; Shared Income Mortgage; Indexation (search for similar items in EconPapers)
JEL-codes: G21 R31 R38 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:71:y:2016:i:c:p:62-74

DOI: 10.1016/j.jbankfin.2016.05.005

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