Research output: Contribution to Journal/Magazine › Journal article
Research output: Contribution to Journal/Magazine › Journal article
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TY - JOUR
T1 - Continuous Workout Mortgages
AU - Shiller, Robert J.
AU - Wojakowski, Rafal
AU - Ebrahim, Shahid
AU - Shackleton, Mark
PY - 2011/5
Y1 - 2011/5
N2 - 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.
AB - 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.
KW - Continuous Workout Mortgage
KW - Insurance
KW - Real estate
KW - Pricing
KW - House prices
KW - household finance
KW - Price bubble
KW - Case-Shiller house price index
KW - Annuity
KW - Continuous time finance
KW - Subprime solution
KW - Finance and the Good Society
M3 - Journal article
JO - NBER Working Papers
JF - NBER Working Papers
SN - 0898-2937
M1 - 17007
ER -