Private information and incentives: Implications for mortgage contract terms and pricing |
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Authors: | Kenneth B Dunn Chester S Spatt |
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Institution: | (1) Graduate School of Industrial Administration, Carnegie Mellon University, and Miller, Anderson and Sherrerd, USA;(2) Graduate School of Industrial Administration, Carnegie Mellon University, USA |
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Abstract: | We examine the linkage in equilibrium among (1) contract design; (2) expected prepayment and default likelihoods; and (3) the pricing of mortgage contracts by focusing upon the effects of the borrower's private information at the time of contracting. We examine the implications of these perspectives upon the empirical analysis of prepayment behavior and use the framework to examine the predominance of long-term mortgage contracts in the United States. We consider examples that explore the trade-offs between fixed and adjustable rate instruments, assumable and due-on-sale loans, and contract interest rates and initial discounts (points). |
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