Structuring Mortgages for Macroeconomic Stability

65 Pages Posted: 6 Mar 2018

See all articles by John Y. Campbell

John Y. Campbell

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Nuno Clara

London Business School

Joao F. Cocco

London Business School; Centre for Economic Policy Research (CEPR)

Date Written: February 2018

Abstract

We study mortgage design features aimed at stabilizing the macroeconomy. Using a calibrated life-cycle model with competitive risk-averse lenders, we consider an adjustable-rate mortgage (ARM) with an option that during recessions allows borrowers to pay only interest on their loan and extend its maturity. We find that this option has several advantages: it stabilizes consumption growth over the business cycle, shifts defaults to expansions, and lowers the equilibrium mortgage rate by stabilizing cash flows to lenders. These advantages are magnified in a low and stable real interest rate environment where the standard ARM delivers less budget relief in a recession.

Keywords: Household Finance, Mortgages

JEL Classification: E21, G21, G33

Suggested Citation

Campbell, John Y. and Clara, Nuno and Cocco, João F., Structuring Mortgages for Macroeconomic Stability (February 2018). Available at SSRN: https://ssrn.com/abstract=3135366 or http://dx.doi.org/10.2139/ssrn.3135366

John Y. Campbell

Harvard University - Department of Economics ( email )

Littauer Center
Room 213
Cambridge, MA 02138
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617-495-7730 (Fax)

HOME PAGE: http://scholar.harvard.edu/campbell

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Nuno Clara

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

João F. Cocco (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
+020 7262-5050 (Phone)
+020 7724-3317 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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