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Mortgages

Paper Session

Friday, Jan. 4, 2019 10:15 AM - 12:15 PM

Hilton Atlanta, Grand Ballroom B
Hosted By: American Finance Association & American Real Estate and Urban Economics Association
  • Chair: Wenlan Qian, National University of Singapore

Structuring Mortgages for Macroeconomic Stability

John Campbell
,
Harvard University
Nuno Clara
,
London Business School
Joao Cocco
,
London Business School

Abstract

We study mortgage design features aimed at stabilizing the macroeconomy. Using a calibrated life-cycle model with competitive risk-averse lenders, we consider an adjustable-rate mortgage (ARM) with an option that during recessions allows borrowers to pay only interest on their loan and extend its maturity. We find that this option has several advantages: it stabilizes consumption growth over the business cycle, shifts defaults to expansions, and lowers the equilibrium mortgage rate by stabilizing cash flows to lenders. These advantages are magnified in a low and stable real interest rate environment where the standard ARM delivers less budget relief in a recession.

Financial Fragility with SAM?

Daniel Greenwald
,
Massachusetts Institute of Technology
Tim Landvoigt
,
University of Pennsylvania
Stijn Van Nieuwerburgh
,
Columbia University

Abstract

Shared Appreciation Mortgages (SAMs) feature mortgage payments that adjust with house prices. These mortgage contracts are designed to stave off home owner default by providing payment relief in the wake of a large house price shock. SAMs have been hailed as an innovative solution that could prevent the next foreclosure crisis, act as a work-out tool during a crisis, and alleviate fiscal pressure during a downturn. They have inspired fintech companies to offer home equity contracts. However, the home owner's gains are the mortgage lender's losses. A general equilibrium model with financial intermediaries who channel savings from saver households to borrower households shows that indexation of mortgage payments to aggregate house prices increases financial fragility, reduces risk sharing, and leads to expensive financial sector bailouts. In contrast, indexation to local house prices reduces financial fragility and improves risk-sharing. The two types of indexation have opposite implications for wealth inequality.

Collateral Misreporting in the RMBS Market

Samuel Kruger
,
University of Texas-Austin
Gonzalo Maturana
,
Emory University

Abstract

Securitized mortgage appraisals routinely target pre-specified valuations, 45% of purchase loan appraisals exactly equal purchase prices, and appraisals virtually never fall below purchase prices. As a result, appraisals exceed automated valuation model (AVM) valuations 60% of the time and are biased upward by an average of 5%. Appraisal bias predicts loan delinquency and RMBS losses and is priced at the loan level through higher interest rates, but it has essentially no impact on RMBS pricing. Selection bias simulations and unfunded loan application appraisals indicate that appraisal bias is intentional, and appraisal bias varies across loan officers, mortgage brokers, and appraisers.
Discussant(s)
Alexei Tchistyi
,
University of Illinois
Barney Hartman-Glaser
,
University of California-Los Angeles
Changcheng Song
,
National University of Singapore
JEL Classifications
  • G0 - General