Structuring Mortgages for Macroeconomic Stability
90 Pages Posted: 6 Mar 2018 Last revised: 22 Jan 2021
Date Written: January 5, 2021
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: Suggested Citation