Wojakowski, R.M. and Ebrahim, M. S. and Shackleton, M.B. (2016) 'Reducing the impact of real estate foreclosures with amortizing participation mortgages.', Journal of banking and finance., 71 . pp. 62-74.
We employ Amortizing Participation Mortgage (APM) to offer a novel ex post renegotiation method of a foreclosure. APM belongs to the family of home loan credit facilities advocated in the Dodd-Frank Wall Street Reform and Consumer Protection Act 2010. In our framework, APMs reduce the endemic agency costs of debt by improving affordability. These benefits increase the demand for real estate in bust times and reduce fragility of the financial system thereby preventing foreclosures. We evaluate APMs in a stochastic control framework and provide solutions for an optimal amortization schedule. We generalize our approach to partially amortizing and commercial mortgages which encompass balloon payments. Finally, we provide concrete numerical examples of home loan modifications. We also offer detailed sensitivity analysis to market parameters such as house price volatility and interest rates.
|Full text:||(AM) Accepted Manuscript|
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|Publisher Web site:||http://dx.doi.org/10.1016/j.jbankfin.2016.05.005|
|Publisher statement:||© 2016 This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/|
|Date accepted:||14 May 2016|
|Date deposited:||01 July 2016|
|Date of first online publication:||24 June 2016|
|Date first made open access:||24 December 2017|
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