Mortgage Amortization and Amplification
Mortgages characterized by negative or low early amortization schedules amplify the macroeconomic effects of a housing risk shock. We analyze the role of mortgage amortization in a two-sector DSGE model with housing risk and endogenous default. Mortgage loan contracts extend to two periods and have adjustable rates. The fraction of principal to be repaid in the first period can vary. As the fraction of principal to be paid in the first period falls, steady-state mortgages and leverage increase and the impact of a housing risk shock on consumption and output is amplified. Borrowers prefer negative amortization. If free to choose the amortization schedule, borrowers would repay most of the principal in the last period of the contract. Low early repayments of principal allow borrowers to hold on to their housing stock and postpone default to the second period having incurred small sunk costs.
|Date of creation:||Feb 2012|
|Date of revision:||Feb 2012|
|Contact details of provider:|| Postal: EPFL - CDM - SFI - CFI, Odyssea, Station 5, CH-1015 Lausanne|
Phone: +41 21 693 00 77
Fax: +41 21 693 00 60
Web page: http://cfi.epfl.ch/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Sterk, Vincent, 2010.
"Credit frictions and the comovement between durable and non-durable consumption,"
Journal of Monetary Economics,
Elsevier, vol. 57(2), pages 217-225, March.
- Vincent Sterk, 2009. "Credit Frictions and the Comovement between Durable and Non-durable Consumption," DNB Working Papers 210, Netherlands Central Bank, Research Department.
- Calza, Alessandro & Stracca, Livio & Monacelli, Tommaso, 2009.
"Housing finance and monetary policy,"
Working Paper Series
1069, European Central Bank.
- Chiara Forlati & Luisa Lambertini, 2011.
"Risky Mortgages in a DSGE Model,"
International Journal of Central Banking,
International Journal of Central Banking, vol. 7(1), pages 285-335, March.
When requesting a correction, please mention this item's handle: RePEc:cif:wpaper:201201. 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: (Corinne Dubois)
If references are entirely missing, you can add them using this form.