Abstract

http://ssrn.com/abstract=1108373
 
 

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Stochastic House Appreciation and Optimal Mortgage Lending


Tomasz Piskorski


Columbia Business School - Finance and Economics

Alexei Tchistyi


Haas School of Business, UC Berkeley

March 25, 2008

AFA 2009 San Francisco Meetings Paper

Abstract:     
We characterize the optimal mortgage contract in a continuous time setting with stochastic growth in house price and income, costly foreclosure, and a risky borrower who requires incentives to repay his debt. We show that many features of subprime loans can be consistent with properties of the optimal contract and that, when house prices decline, mortgage modification can create value for borrowers and lenders. Our model provides a number of empirical predictions that relate the features of mortgage contracts originated in a housing boom and the extent of their modification in a slump to location and borrowers' characteristics.

Number of Pages in PDF File: 59

Keywords: subprime mortgages, house appreciation, optimal contract, mortgage modifcation

JEL Classification: G21, G28, D14

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Date posted: March 25, 2008 ; Last revised: August 20, 2011

Suggested Citation

Piskorski, Tomasz and Tchistyi, Alexei, Stochastic House Appreciation and Optimal Mortgage Lending (March 25, 2008). AFA 2009 San Francisco Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1108373 or http://dx.doi.org/10.2139/ssrn.1108373

Contact Information

Tomasz Piskorski
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States

Alexei Tchistyi (Contact Author)
Haas School of Business, UC Berkeley ( email )
F602 Haas School of Business
University of California
Berkeley, CA 94720
United States
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