The Adjustable Balance Mortgage: Reducing the Value of the Put

33 Pages Posted: 16 May 2009

See all articles by Brent W. Ambrose

Brent W. Ambrose

Pennsylvania State University

Richard J. Buttimer

University of North Carolina (UNC) at Charlotte - Department of Finance & Business Law

Date Written: May 15, 2009

Abstract

We propose a new mortgage contract that endogenizes the risk of house price declines and thus minimizes default risk resulting from changes in the underlying asset value while still retaining contract rates near the cost of a standard fixed-rate mortgage. Our new mortgage recognizes that the lender is the most economically efficient bearer of house price risk. By reducing the role of the legal system in mitigating house price risk, the new mortgage reduces the negative externalities and social costs arising from defaults resulting from house price risk. In other words, the new mortgage minimizes the need to use the legal foreclosure system to deal with the economic risk of house price declines.

Keywords: Mortgage Default, Foreclosure, Modification

JEL Classification: D1, G1

Suggested Citation

Ambrose, Brent W. and Buttimer, Richard J., The Adjustable Balance Mortgage: Reducing the Value of the Put (May 15, 2009). Available at SSRN: https://ssrn.com/abstract=1405446 or http://dx.doi.org/10.2139/ssrn.1405446

Brent W. Ambrose (Contact Author)

Pennsylvania State University ( email )

University Park, PA 16802-3306
United States
814-867-0066 (Phone)
814-865-6284 (Fax)

Richard J. Buttimer

University of North Carolina (UNC) at Charlotte - Department of Finance & Business Law ( email )

9201 University City Blvd.
Charlotte, NC 28223
United States
704 687-6219 (Phone)

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