Continuous Workout Mortgages, Refinancing and Prepayments

Posted: 1 Dec 2010 Last revised: 11 Apr 2011

See all articles by Muhammed Shahid Ebrahim

Muhammed Shahid Ebrahim

Durham Business School

Mark B. Shackleton

Lancaster University - Department of Accounting and Finance

Rafal M. Wojakowski

University of Surrey; Lancaster University - Management School

Date Written: April 8, 2011

Abstract

We model Continuous Workout Mortgages (CWMs) in an economic environment with refinancings and prepayments by employing a market-observable variable such as the house price index. Our main results include: (a) explicit modelling of repayment and interest-only CWMs; (b) closed form formulae for mortgage payment and mortgage balance of a repayment CWM; (c) a closed form formula for the actuarially fair mortgage rate of an interest-only CWM. For repayment CWMs we extend our analysis to include two negotiable parameters: adjustable \"workout proportion\" and adjustable \"workout threshold.\" These results are of importance as they not only help understanding the mechanics of CWMs and estimating key contract parameters. Our results also provide guidance on how to mitigate systemic risk.

JEL Classification: L1

Suggested Citation

Ebrahim, Muhammed Shahid and Shackleton, Mark B. and Wojakowski, Rafal M., Continuous Workout Mortgages, Refinancing and Prepayments (April 8, 2011). 46th Annual AREUEA Conference Paper. Available at SSRN: https://ssrn.com/abstract=1717061

Muhammed Shahid Ebrahim

Durham Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

Mark B. Shackleton

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
44 1524 594131 (Phone)
44 1524 847321 (Fax)

Rafal M. Wojakowski (Contact Author)

University of Surrey ( email )

Faculty of Business, Economics and Law
The Surrey Business School
Guildford, Surrey GU2 7XH
United Kingdom
+44 1483 683477 (Phone)

HOME PAGE: http://www.surrey.ac.uk/sbs/people/rafal_wojakowski/index.htm

Lancaster University - Management School ( email )

Lancaster, LA1 4YX
United Kingdom
+44 (1524) 593630 (Phone)
(01524) 847321 (Fax)

HOME PAGE: http://www.lums.lancs.ac.uk/profiles/rafal-wojakowski/

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