Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5099617 | Journal of Economic Dynamics and Control | 2007 | 28 Pages |
Abstract
The efficiency of the housing finance system is of interest to homeowners, financial intermediaries and policy makers. We study the design of optimal mortgage contracts for risk-averse economic agents with access to symmetric information on the payoffs of a risky home. Our non-linear framework helps demonstrate the pareto-efficiency of a risk-free loan over its risky counterpart. It also allows us to evaluate the unique equilibrium interest rate, loan amount and home price in contrast to the capital structure theorems. Finally, we conduct numerical simulations (in lieu of comparative statics) to shed some light on the complex causal relationship between mortgage pricing parameters and the underlying collateral (i.e., home value).
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
M. Shahid Ebrahim, Ike Mathur,