Mortgage Design in an Equilibrium Model of the Housing Market
ADAM M. GUREN
Search for more papers by this authorCorresponding Author
ARVIND KRISHNAMURTHY
Correspondence: Arvind Krishnamurthy, Stanford Graduate School of Business, 655 Knight Way, Stanford, CA 94305, 650-723-1985 and NBER. e-mail: akris@stanford.edu.
Search for more papers by this authorTIMOTHY J. MCQUADE
Adam Guren is with Boston University and NBER. Arvind Krishnamurthy is with Stanford Graduate School of Business and NBER. Tim McQuade is with Stanford Graduate School of Business. The authors would like to thank Chaojun Wang and Xuiyi Song for excellent research assistance; seminar participants at SED, SITE, Kellogg, Queen's, Indiana, LSE, Boston University, HULM, Housing: Micro Data, Macro Problems, NBER Summer Institute Capital Markets and the Economy, CEPR Housing and the Macroeconomy, Chicago Booth Asset Pricing, UCLA, University of Pittsburgh, MIT Sloan, Wharton, and the University of Pennsylvania; as well as Tomasz Piskorski; Erwan Quintin; Jan Eberly; Alex Michaelides; Alexei Tchistyi; and Andreas Fuster for useful comments. Guren acknowledges research support from the National Science Foundation under grant #1623801 and from the Boston University Center for Finance, Law, and Policy. Aside from these funding sources, all three authors have nothing to disclose with respect to The Journal of Finance disclosure policy.
Search for more papers by this authorADAM M. GUREN
Search for more papers by this authorCorresponding Author
ARVIND KRISHNAMURTHY
Correspondence: Arvind Krishnamurthy, Stanford Graduate School of Business, 655 Knight Way, Stanford, CA 94305, 650-723-1985 and NBER. e-mail: akris@stanford.edu.
Search for more papers by this authorTIMOTHY J. MCQUADE
Adam Guren is with Boston University and NBER. Arvind Krishnamurthy is with Stanford Graduate School of Business and NBER. Tim McQuade is with Stanford Graduate School of Business. The authors would like to thank Chaojun Wang and Xuiyi Song for excellent research assistance; seminar participants at SED, SITE, Kellogg, Queen's, Indiana, LSE, Boston University, HULM, Housing: Micro Data, Macro Problems, NBER Summer Institute Capital Markets and the Economy, CEPR Housing and the Macroeconomy, Chicago Booth Asset Pricing, UCLA, University of Pittsburgh, MIT Sloan, Wharton, and the University of Pennsylvania; as well as Tomasz Piskorski; Erwan Quintin; Jan Eberly; Alex Michaelides; Alexei Tchistyi; and Andreas Fuster for useful comments. Guren acknowledges research support from the National Science Foundation under grant #1623801 and from the Boston University Center for Finance, Law, and Policy. Aside from these funding sources, all three authors have nothing to disclose with respect to The Journal of Finance disclosure policy.
Search for more papers by this authorABSTRACT
How can mortgages be redesigned to reduce macrovolatility and default? We address this question using a quantitative equilibrium life-cycle model. Designs with countercyclical payments outperform fixed payments. Among those, designs that front-load payment reductions in recessions outperform those that spread relief over the full term. Front-loading alleviates liquidity constraints when they bind most, reducing default and stimulating housing demand. To illustrate, a fixed-rate mortgage (FRM) with an option to convert to adjustable-rate mortgage, which front-loads payment reductions relative to an FRM with an option to refinance underwater, reduces price and consumption declines six times as much and default three times as much.
Supporting Information
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| jofi12963-sup-0001-OnlineAppendix.pdf1.3 MB | Appendix S1: Internet Appendix. |
| jofi12963-sup-0002-ReplicationCode.zip675.2 MB | Replication Code. |
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