The Loan Structure and Housing Tenure Decisions in an Equilibrium Model of Mortgage Choice

FRB of St. Louis Working Paper No. 2008-024A

45 Pages Posted: 17 Jul 2008 Last revised: 28 Jan 2009

See all articles by Matthew Chambers

Matthew Chambers

Towson University

Carlos Garriga

Federal Reserve Banks - Research Division

Don Schlagenhauf

Florida State University

Date Written: December 1, 2008

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: Housing finance, first-time buyers, life-cycle

JEL Classification: E2, E6

Suggested Citation

Chambers, Matthew and Garriga, Carlos and Schlagenhauf, Don, The Loan Structure and Housing Tenure Decisions in an Equilibrium Model of Mortgage Choice (December 1, 2008). FRB of St. Louis Working Paper No. 2008-024A, Available at SSRN: https://ssrn.com/abstract=1161124 or http://dx.doi.org/10.2139/ssrn.1161124

Matthew Chambers

Towson University ( email )

8000 York Road, ST 100A
Towson, MD 21204
United States

Carlos Garriga (Contact Author)

Federal Reserve Banks - Research Division ( email )

P.O. Box 442
St. Louis, MO 63166-0442
United States
(314) 444-7412 (Phone)
(314) 444-8731 (Fax)

Don Schlagenhauf

Florida State University ( email )

Department of Economics
Tallahasse, FL 32306
United States

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