Structuring Mortgages for Macroeconomic Stability

90 Pages Posted: 6 Mar 2018 Last revised: 22 Jan 2021

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; Duke University - Finance

Joao F. Cocco

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

Multiple version iconThere are 2 versions of this paper

Date Written: January 5, 2021

Abstract

We study mortgage design features aimed at stabilizing the macroeconomy. We model overlapping generations of mortgage borrowers and an infinitely lived risk-averse representative mortgage lender. Mortgages are priced using an equilibrium pricing kernel derived from the lender's endogenous consumption. 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 maturity extension option stabilizes consumption growth over the business cycle, shifts defaults to expansions, and is welfare enhancing. The cyclical properties of the maturity extension ARM are attractive to a risk-averse lender so the mortgage can be provided at a relatively low cost.

Keywords: Household Finance, Mortgages

JEL Classification: E21, G21, G33

Suggested Citation

Campbell, John Y. and Clara, Nuno and Clara, Nuno and Cocco, João F., Structuring Mortgages for Macroeconomic Stability (January 5, 2021). Journal of Finance, Forthcoming, 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 )

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

National Bureau of Economic Research (NBER)

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Nuno Clara

London Business School ( email )

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Duke University - Finance ( email )

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HOME PAGE: http://www.nunoclara.com

João F. Cocco (Contact Author)

London Business School ( email )

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+020 7724-3317 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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