Mitigating financial fragility with Continuous Workout Mortgages

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

Journal of Economic Behavior & Organization, 2013, vol. 85, issue C, 269-285

Abstract: This paper models Continuous Workout Mortgages (CWMs) in an economic environment with refinancings and prepayments. CWMs are home loans whose balance and payments are indexed using a market-observable house price index of the pertaining locality. Our main results include: (a) explicit modelling of repayment and interest-only CWMs; (b) closed form formula 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 in the understanding of the mechanics of CWMs and estimating key contract parameters, but they also provide insight on how to enhance the resilience of the financial architecture and mitigate systemic risk.

Keywords: Continuous Workout Mortgage (CWM); Repayment; 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)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:85:y:2013:i:c:p:269-285

DOI: 10.1016/j.jebo.2012.04.010

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