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Reducing the impact of real estate foreclosures with Amortizing Participation Mortgages

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  • Wojakowski, Rafal M.
  • Ebrahim, M. Shahid
  • Shackleton, Mark B.

Abstract

We employ Amortizing Participation Mortgage (APM) to offer a novel ex post renegotiation method of a foreclosure. APM belongs to the family of home loan credit facilities advocated in the Dodd–Frank Wall Street Reform and Consumer Protection Act 2010. In our framework, APMs reduce the endemic agency costs of debt by improving affordability. These benefits increase the demand for real estate in bust times and reduce fragility of the financial system thereby preventing foreclosures. We evaluate APMs in a stochastic control framework and provide solutions for an optimal amortization schedule. We generalize our approach to partially amortizing and commercial mortgages which encompass balloon payments. Finally, we provide concrete numerical examples of home loan modifications. We also offer detailed sensitivity analysis to market parameters such as house price volatility and interest rates.

Suggested Citation

  • Wojakowski, Rafal M. & Ebrahim, M. Shahid & Shackleton, Mark B., 2016. "Reducing the impact of real estate foreclosures with Amortizing Participation Mortgages," Journal of Banking & Finance, Elsevier, vol. 71(C), pages 62-74.
    • Handle: RePEc:eee:jbfina:v:71:y:2016:i:c:p:62-74
    DOI: 10.1016/j.jbankfin.2016.05.005
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    More about this item

    Keywords

    Dodd–Frank Act; Home loan modification; Prepayment; Default; Partial amortization; Shared Income Mortgage; Indexation;
    All these keywords.

    JEL classification:

    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
    • R38 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Government Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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