Structuring Mortgages for Macroeconomic Stability
65 Pages Posted: 6 Mar 2018
Date Written: February 2018
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: Suggested Citation