The loan structure and housing tenure decisions in an equilibrium model of mortgage choice

Matthew Chambers (mchambers@towson.edu), Carlos Garriga (carlos.garriga@stls.frb.org) and Don Schlagenhauf

No 2008-024, Working Papers from Federal Reserve Bank of St. Louis

Abstract: The objective of this paper is to understand how loan structure affects (i) the borrower?s selection of a mortgage contract and (ii) the aggregate economy. We develop a quantitative equilibrium theory of mortgage choice where households can choose from a menu of long-term (nominal) mortgage loans. The model accounts for observed patterns in housing consumption, ownership, and portfolio allocations. We find that the loan structure is a quantitatively significant factor in a household?s housing finance decision. The model suggests that the mortgage structure preferred by a household is dependent on age and income and that loan products with low initial payments offer an alternative to mortgages with no downpayment. These effects are more important when inflation is low. The presence of inflation reduces the real value of the mortgage payment and the outstanding loan overtime reducing mobility. Changes in the structure of mortgages have implications for risk sharing.

Keywords: Mortgage; loans (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-dge and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (85)

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Journal Article: The Loan Structure and Housing Tenure Decisions in an Equilibrium Model of Mortgage Choice (2009)
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DOI: 10.20955/wp.2008.024

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