The Adjustable Balance Mortgage: Reducing the Value of the Put |
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| Authors: | Brent W Ambrose Richard J Buttimer Jr |
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| Institution: | 1. Institute for Real Estate Studies, Smeal College of Business, The Pennsylvania State University, University Park, PA 16802 or bwa10@psu.edu.;2. Department of Finance, Belk College of Business Administration, The University of North Carolina at Charlotte, 9201 University City Boulevard, Charlotte, NC 28223‐0001 or buttimer@uncc.edu. |
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| Abstract: | We propose a new mortgage contract that endogenously captures the risk of house price declines to minimize default risk resulting from changes in the underlying asset value while still retaining contract rates near the cost of a standard fixed‐rate mortgage. By reducing the role of the legal system in mitigating house price risk, the new mortgage reduces the negative externalities and social costs arising from defaults. In other words, the new mortgage minimizes the need to use the legal foreclosure system to deal with the economic risk of house price declines. |
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