Home > Working Papers

Working Paper 2008-024A

Search | View by Year | View by Category | View by Author

"The Loan Structure and Housing Tenure Decisions in an Equilibrium Model of Mortgage Choice"
by Matthew Chambers, Carlos Garriga, and Don Schlagenhauf

The past decade has brought substantial innovations in the structure of mortgage loans. The objective of this paper is to understand how loan structure (terms of repayment and amortization schedule) affects (i) the borrower’s selection of a mortgage contract and (ii) the aggregate economy. We develop a quantitative equilibrium theory of mortgage choice where housing plays the dual role of a consumption and a risky investment good. Households can choose from a menu of long-term mortgage loans that differ in structure. We show that our model accounts for observed patterns in housing consumption, ownership, and asset portfolio allocations. Our model predicts that the loan structure is a quantitatively significant factor in a household’s housing finance decision. The model suggests that the mortgage structure preferred by a household is dependent on age and income dependent and that loan products with low initial payments offer an alternative to mortgages with no downpayment. At the macroeconomic level, the model suggests a connection between the loan structure, ownership, and rental markets. In addition, we and evidence that the volume of housing transactions increases when payments increase over time and households have little housing equity. In contrast, we show that loans that allow for a rapid accumulation of home equity can still have positive participation effects without increasing the volatility of housing transactions.

Full Text - Acrobat PDF (327k)

Notify Me of Updates for:
Category > Banking
Category > Finance
Category > Monetary Policy/Macroeconomics
Author > Carlos Garriga