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Mitigating financial fragility with Continuous Workout Mortgages

Shiller, Robert J. and Wojakowski, Rafal and Ebrahim, Shahid and Shackleton, Mark (2013) Mitigating financial fragility with Continuous Workout Mortgages. Journal of Economic Behavior and Organization, 85. pp. 269-285. ISSN 0167-2681

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    Abstract

    This paper models Continuous Workout Mortgages (CWMs) in an economic environment with refinancings and prepayments. CWMs are home loans whose balance and payments are indexed using a market-observable house price index of the pertaining locality. Our main results include: (a) explicit modelling of repayment and interest-only CWMs; (b) closed form formulæ 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 insight on how to enhance the resilience of the financial architecture and mitigate systemic risk.

    Item Type: Article
    Journal or Publication Title: Journal of Economic Behavior and Organization
    Additional Information: The final, definitive version of this article has been published in the Journal, Journal of Economic Behavior and Organization 85, 2013, © ELSEVIER.
    Uncontrolled Keywords: Continuous Workout Mortgage (CWM) ; Repayment ; House price index ; Prepayment intensity ; Cap and floor on continuous flow
    Subjects: H Social Sciences > HG Finance
    Departments: Lancaster University Management School > Accounting & Finance
    ID Code: 53729
    Deposited By: ep_importer_pure
    Deposited On: 24 Apr 2012 13:46
    Refereed?: Yes
    Published?: Published
    Last Modified: 19 Dec 2013 16:44
    Identification Number:
    URI: http://eprints.lancs.ac.uk/id/eprint/53729

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