Structuring mortgages for macroeconomic stability

Subject

Finance

Publishing details

Social Sciences Research Network

Authors / Editors

Campbell J Y; Clara N; Cocco J

Biographies

Publication Year

2018

Abstract

We study mortgage design features aimed at stabilizing the macroeconomy. Using a calibrated life-cycle model with competitive risk-averse lenders, we consider an adjustable-rate mortgage (ARM) with an option that during recessions allows borrowers to pay only interest on their loan and extend its maturity. We find that this option has several advantages: it stabilizes consumption growth over the business cycle, shifts defaults to expansions, and lowers the equilibrium mortgage rate by stabilizing cash flows to lenders. These advantages are magnified in a low and stable real interest rate environment where the standard ARM delivers less budget relief in a recession

Keywords

Household finance; Mortgages

Publication Notes

Presented at the 2018 NBER Summer Institute (Capital Markets and the Economy, Real Estate).

Series

Social Sciences Research Network