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Continuous Workout Mortgages

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  • Robert J. Shiller
  • Rafal M. Wojakowski
  • M. Shahid Ebrahim
  • Mark B. Shackleton

Abstract

Continuous Workout Mortgage (CWM) balance and payments are indexed using market-observable house price index in an economic environment with prepayments. Our main results include: (a) explicit modelling of repayment and interest-only CWMs; (b) closed form formulas 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 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17007.

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Date of creation: May 2011
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Handle: RePEc:nbr:nberwo:17007

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Cited by:
  1. Campbell, John Y., 2012. "Mortgage Market Design," Scholarly Articles 9887618, Harvard University Department of Economics.
  2. John Y. Campbell, 2013. "Mortgage Market Design," Review of Finance, European Finance Association, vol. 17(1), pages 1-33.

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