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PLAM Default Risk

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  • Peter J. Elmer

    (Resolution Trust Corporation 801 Seventeenth Street, N.W. Washington, D.C. 20434-0001)

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    Abstract

    This article combines cross-sectional time series data on real estate appreciation rates during the 1974 to 1989 period with an option-based model of mortgage default to simulate the default and loss characteristics of price level-adjusted mortgages (PLAMs) and standard fixed-payment mortgages (FPMs). The analysis finds significantly higher default risk for PLAMs than recognized by previous research. In particular, the expected loss of twenty- and thirty-year PLAMs with common initial loan-to-value (LTV) ratios is two to seven times higher than the expected loss of comparable FPMs and these PLAMs have much longer periods of high default risk than FPMs. Maturity must be reduced to fifteen years in order to bring PLAM default risk approximately in line with FPM default risk for most LTVs.

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    File URL: http://aux.zicklin.baruch.cuny.edu/jrer/papers/pdf/past/vol07n02/v07p157.pdf
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    Bibliographic Info

    Article provided by American Real Estate Society in its journal Journal of Real Estate Research.

    Volume (Year): 7 (1992)
    Issue (Month): 2 ()
    Pages: 157-168

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    Handle: RePEc:jre:issued:v:7:n:2:1992:p:157-168

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    Postal: American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323
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    Web page: http://www.aresnet.org/

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    Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
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    Web: http://aux.zicklin.baruch.cuny.edu/jrer/about/get.htm

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    1. Richard L. Cooperstein & F. Stevens Redburn & Harry G. Meyers, 1991. "Modelling Mortgage Terminations in Turbulent Times," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 19(4), pages 473-494.
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    Cited by:
    1. Isil Erol & Kanak Patel, 2004. "Housing Policy and Mortgage Finance in Turkey During the Late 1990s Inflationary Period," International Real Estate Review, Asian Real Estate Society, vol. 7(1), pages 98-120.
    2. Isil Erol & Kanak Patel, 2007. "Pricing the Default Option of Inflation-Indexed Mortgages Using Explicit Finite Difference Method," International Real Estate Review, Asian Real Estate Society, vol. 10(1), pages 48-92.

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