The Adjustable Balance Mortgage: Reducing the Value of the Put
33 Pages Posted: 16 May 2009
Date Written: May 15, 2009
We propose a new mortgage contract that endogenizes the risk of house price declines and thus minimizes default risk resulting from changes in the underlying asset value while still retaining contract rates near the cost of a standard fixed-rate mortgage. Our new mortgage recognizes that the lender is the most economically efficient bearer of house price risk. By reducing the role of the legal system in mitigating house price risk, the new mortgage reduces the negative externalities and social costs arising from defaults resulting from house price risk. In other words, the new mortgage minimizes the need to use the legal foreclosure system to deal with the economic risk of house price declines.
Keywords: Mortgage Default, Foreclosure, Modification
JEL Classification: D1, G1
Suggested Citation: Suggested Citation