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The macro-financial implications of house price-indexed mortgage contracts

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  • Hull, Isaiah

Abstract

I explore an alternative mortgage contract that limits negative equity by tying outstanding debt to an index of house prices. This is done in an incomplete markets model, that is calibrated to match US micro- and macro-data. I find that switching from a non-recourse contract to an indexed contract reduces the default rate from .72% to .11% and expands homeownership rates among the young and the poor but pushes up the equilibrium base mortgage rate by 90 basis points. The volatility of net cashflows to financial intermediaries also increases slightly under the new contract.

Suggested Citation

  • Hull, Isaiah, 2015. "The macro-financial implications of house price-indexed mortgage contracts," Economics Letters, Elsevier, vol. 127(C), pages 81-85.
    • Handle: RePEc:eee:ecolet:v:127:y:2015:i:c:p:81-85
    DOI: 10.1016/j.econlet.2014.12.033
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    Cited by:

    1. Hull, Isaiah, 2017. "Amortization requirements and household indebtedness: An application to Swedish-style mortgages," European Economic Review, Elsevier, vol. 91(C), pages 72-88.
    2. Daniel L. Greenwald & Tim Landvoigt & Stijn Van Nieuwerburgh, 2021. "Financial Fragility with SAM?," Journal of Finance, American Finance Association, vol. 76(2), pages 651-706, April.
    3. Anna Grodecka, 2020. "On the Effectiveness of Loan‐to‐Value Regulation in a Multiconstraint Framework," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(5), pages 1231-1270, August.

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    More about this item

    Keywords

    Default; Mortgages; Interest rates; Heterogeneous agents; Incomplete markets;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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