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Financial Fragility with SAM?

45 Pages Posted: 15 Nov 2017 Last revised: 22 Nov 2017

Daniel L. Greenwald

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Tim Landvoigt

University of Pennsylvania - The Wharton School

Stijn Van Nieuwerburgh

New York University Stern School of Business, Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: November 21, 2017

Abstract

Shared Appreciation Mortgages (SAMs) feature mortgage payments that adjust with house prices. These mortgage contracts are designed to stave off home owner default by providing payment relief in the wake of a large house price shock. SAMs have been hailed as an innovative solution that could prevent the next foreclosure crisis, act as a work-out tool during a crisis, and alleviate fiscal pressure during a downturn. They have inspired Fintech companies to offer home equity contracts. However, the home owner's gains are the mortgage lender's losses. A general equilibrium model with financial intermediaries who channel savings from saver households to borrower households shows that indexation of mortgage payments to aggregate house prices increases financial fragility, reduces risk sharing, and leads to expensive financial sector bailouts. In contrast, indexation to local house prices reduces financial fragility and improves risk-sharing. The two types of indexation have opposite implications for wealth inequality.

Keywords: mortgage design, financial intermediation, housing policy

JEL Classification: G01, G21, E44

Suggested Citation

Greenwald, Daniel L. and Landvoigt, Tim and Van Nieuwerburgh, Stijn, Financial Fragility with SAM? (November 21, 2017). Available at SSRN: https://ssrn.com/abstract=3069621

Daniel Greenwald

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Ave. E62-663
Cambridge, MA 02142
United States

Tim Landvoigt (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Stijn Van Nieuwerburgh

New York University Stern School of Business, Department of Finance ( email )

44 West 4th Street
Suite 9-190
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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