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Continuous Workout Mortgages

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Author Info

  • Robert J. Shiller

    ()
    (Cowles Foundation, Yale University)

  • Rafal M. Wojakowski

    (Lancaster University Management School, Accounting and Finance)

  • M. Shahid Ebrahim

    (Bangor Business School, Bangor University)

  • Mark B. Shackleton

    (Lancaster University Management School)

Abstract

This paper models Continuous Workout Mortgages (CWMs) in an economic environment with refinancings and prepayments by employing a market-observable variable such as the house price index of the pertaining locality. Our main results include: (a) explicit modelling of repayment and interest-only CWMs; (b) closed form formulae for mortgage payment and mortgage balance of a repayment CWM; (c) a closed form formula for the actuarially fair mortgage rate of an interest-only CWM. For repayment CWMs we extend our analysis to include two negotiable parameters: adjustable "workout proportion" and adjustable "workout threshold." These results are of importance as they not only help understanding the mechanics of CWMs and estimating key contract parameters. These results are of importance as they not only help in the understanding of the mechanics of CWMs and estimating key contract parameters, but they also provide guidance on how to enhance the resilience of the financial architecture and mitigate systemic risk.

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File URL: http://cowles.econ.yale.edu/P/cd/d17b/d1794.pdf
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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1794.

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Length: 41 pages
Date of creation: Apr 2011
Date of revision:
Handle: RePEc:cwl:cwldpp:1794

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Web page: http://cowles.econ.yale.edu/
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

Related research

Keywords: Continuous Workout Mortgage (CWM); Repayment; Interest-only; House price index; Prepayment intensity; Cap and floor on continuous flow;

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Cited by:
  1. John Y. Campbell, 2012. "Mortgage Market Design," NBER Working Papers 18339, National Bureau of Economic Research, Inc.
  2. Campbell, John Y., 2012. "Mortgage Market Design," Scholarly Articles 9887618, Harvard University Department of Economics.

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