Reducing the impact of real estate foreclosures with Amortizing Participation Mortgages

Wojakowski, Rafal and Ebrahim, Shahid and Shackleton, Mark Broughton (2016) Reducing the impact of real estate foreclosures with Amortizing Participation Mortgages. Journal of Banking and Finance, 71. pp. 62-74. ISSN 0378-4266

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Abstract

We employ Amortizing Participation Mortgage (APM) to offer a novel ex post renegotiation method of a foreclosure. APM belongs to the family of home loan credit facilities advocated in the Dodd-Frank Wall Street Reform and Consumer Protection Act 2010. In our framework, APMs reduce the endemic agency costs of debt by improving affordability. These benefits increase the demand for real estate in bust times and reduce fragility of the financial system thereby preventing foreclosures. We evaluate APMs in a stochastic control framework and provide solutions for an optimal amortization schedule. We generalize our approach to partially amortizing and commercial mortgages which encompass balloon payments. Finally, we provide concrete numerical examples of home loan modifications. We also offer detailed sensitivity analysis to market parameters such as house price volatility and interest rates.

Item Type:
Journal Article
Journal or Publication Title:
Journal of Banking and Finance
Additional Information:
This is the author’s version of a work that was accepted for publication in Journal of Banking and Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Banking and Finance, 71, 2016 DOI: 10.1016/j.jbankfin.2016.05.005
Uncontrolled Keywords:
/dk/atira/pure/subjectarea/aacsb/disciplinebasedresearch
Subjects:
ID Code:
79559
Deposited By:
Deposited On:
16 May 2016 12:24
Refereed?:
Yes
Published?:
Published
Last Modified:
09 Apr 2020 02:44