An Equilibrium Model of Housing and Mortgage Markets with State-Contingent Lending Contracts

72 Pages Posted: 25 Jan 2017 Last revised: 10 Jan 2022

See all articles by Tomasz Piskorski

Tomasz Piskorski

Columbia University - Columbia Business School, Finance

Alexei Tchistyi

Cornell SC Johnson College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: September 25, 2020

Abstract

We develop a tractable general equilibrium framework of housing and mortgage markets with aggregate and idiosyncratic risks, costly defaults, empirically relevant informational asymmetries, and competition in mortgage design. We characterize equilibrium mortgage contracts when indexation to aggregate states of the economy is possible. If borrowers' individual homeownership values are known, the equilibrium state-contingent mortgage payments positively depend on aggregate wages and house prices. When lenders cannot observe these values, the equilibrium contract only depends on house prices and takes the form of a home equity insurance mortgage (HEIM). Interestingly, while beneficial for most borrowers, HEIMs may decrease homeownership rate and welfare of marginal homebuyers. In some cases, unrestricted competition in mortgage design may lead to non-existence of equilibrium.








Keywords: State-contingent lending contracts, mortgage design, home equity insurance, asymmetric information, housing market, general equilibrium

JEL Classification: G21, G28, G01, D1, D5, E3

Suggested Citation

Piskorski, Tomasz and Tchistyi, Alexei, An Equilibrium Model of Housing and Mortgage Markets with State-Contingent Lending Contracts (September 25, 2020). Columbia Business School Research Paper No. 17-18, Available at SSRN: https://ssrn.com/abstract=2904676 or http://dx.doi.org/10.2139/ssrn.2904676

Tomasz Piskorski (Contact Author)

Columbia University - Columbia Business School, Finance ( email )

3022 Broadway
New York, NY 10027
United States

Alexei Tchistyi

Cornell SC Johnson College of Business ( email )

Ithaca, NY 14850
United States

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