Working Paper: NBER ID: w17007
Authors: Robert J. Shiller; Rafal M. Wojakowski; M. Shahid Ebrahim; Mark B. Shackleton
Abstract: 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.
Keywords: continuous workout mortgages; systemic risk; financial resilience
JEL Codes: C63; D11; D14; D92; G13; G21; R31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| CWMs (Y90) | likelihood of default (G33) |
| CWMs (Y90) | defaults (Y60) |
| CWMs (Y90) | moral hazard (G52) |
| CWMs (Y90) | systemic risk (E44) |
| local house price indices (R31) | CWMs adjustments (F32) |
| borrower income indicators (G51) | CWMs prevent moral hazard (G22) |
| CWMs (Y90) | flexible repayment options (G51) |
| CWMs (Y90) | financial outcomes (G39) |