Mortgages as Recursive Contracts
Mortgages are one-sided contracts under which the borrower may terminate the contract at any time, while the lender must commit to honoring the terms of the contract throughout its life. There are two aspects to this feature of the contract that are modeled in this paper. The first is that the borrower may choose between buying a house or renting. Given these alternatives, a contract between a household and a lender makes homeownership feasible, and provides insurance to the household against fluctuating rental payments. The second is that once in a contract, the household may terminate the contract by refinancing the future mortgage, and thus enter into a new contract. This option will be exercised whenever a combination of house price appreciation and declines in the mortgage rate is sufficient to increase the ex ante expected lifetime utility from the new versus the old contract
|Date of creation:||11 Aug 2004|
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- Paul Bennett & Richard Peach & Stavros Peristiani, 1997.
"Structural change in the mortgage market and the propensity to refinance,"
9736, Federal Reserve Bank of New York.
- Bennett, Paul & Peach, Richard & Peristiani, Stavros, 2001. "Structural Change in the Mortgage Market and the Propensity to Refinance," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(4), pages 955-75, November.
- Paul Bennett & Richard Peach & Stavros Peristiani, 1998. "Structural change in the mortgage market and the propensity to refinance," Staff Reports 45, Federal Reserve Bank of New York.
- Todd Sinai & Nicholas S. Souleles, 2005.
"Owner-occupied housing as a hedge against rent risk,"
05-10, Federal Reserve Bank of Philadelphia.
- Todd Sinai & Nicholas S. Souleles, 2003. "Owner-Occupied Housing as a Hedge Against Rent Risk," NBER Working Papers 9462, National Bureau of Economic Research, Inc.
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