Inflation Risk, Payment Tilt, and the Design of Partially Indexed Affordable Mortgages
This paper integrates two fundamentally important parameters into a theory of optimal mortgage design: the proportion of inflation risk borne by the lender / investor and the borrower and the amortization-graduation schedule for loan repayments. Equations are derived for a family of innovative mortgages, termed hybrid PLAMs, which offer advantages to borrowers and lenders over either the standard fixed rate mortgage (FRM) or the price level adjusted mortgage (PLAM). The superiority of the hybrid PLAMs lies in their ability to simultaneously and independently accommodate differing degrees of inflation-risk sharing and payment affordability. Inflation-risk sharing is represented by an indexation parameter set over a continuum of values such that the FRM has zero index variability and the PLAM has unit index variability. Similarly, payment tilt is represented by a tilt parameter such that the FRM has zero tilt and the PLAM has unit tilt. We demonstrate that these two parameters are independent and can each be continuously varied in a two-dimensional family of self-amortizing mortgages. A specific hybrid PLAM can be designed to partition inflation risk in any proportion between the borrower and the lender and to simultaneously prescribe any level of payment tilt between the extremes of the FRM and PLAM. The behavior of representative hybrid PLAMs is simulated and compared to FRMs and PLAMs for three different inflation scenarios, one of which uses actual market data from the period of 1960-1990. Copyright American Real Estate and Urban Economics Association.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 21 (1993)
Issue (Month): 1 ()
|Contact details of provider:|| Postal: |
Phone: (812) 855-7794
Fax: (812) 855-8679
Web page: http://www.blackwellpublishing.com/journal.asp?ref=1080-8620
More information through EDIRC
|Order Information:||Web: http://www.blackwellpublishing.com/subs.asp?ref=1080-8620|
When requesting a correction, please mention this item's handle: RePEc:bla:reesec:v:21:y:1993:i:1:p:1-25. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)or (Christopher F. Baum)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.