The Adjustable Balance Mortgage: Reducing the Value of the Put

30 Pages Posted: 25 Aug 2012

See all articles by Brent W. Ambrose

Brent W. Ambrose

Pennsylvania State University

Richard J. Buttimer Jr.

affiliation not provided to SSRN

Date Written: Fall 2012

Abstract

We propose a new mortgage contract that endogenously captures the risk of house price declines to minimize default risk resulting from changes in the underlying asset value while still retaining contract rates near the cost of a standard fixed‐rate mortgage. 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. 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.

Suggested Citation

Ambrose, Brent W. and Buttimer Jr., Richard J., The Adjustable Balance Mortgage: Reducing the Value of the Put (Fall 2012). Real Estate Economics, Vol. 40, Issue 3, pp. 536-565, 2012. Available at SSRN: https://ssrn.com/abstract=2135974 or http://dx.doi.org/10.1111/j.1540-6229.2011.00320.x

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 Jr.

affiliation not provided to SSRN

No Address Available

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