Journal of Finance Vol. 76 No. 5 2021
Structuring Mortgages for Macroeconomic Stability
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.
- DOI
- 10.1111/jofi.13056
- Volume
- 76
- Issue
- 5
- Pages
- 2525-2576
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref