The loan structure and housing tenure decisions in an equilibrium model of mortgage choice

The objective of this paper is to understand how loan structure 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 households can choose from a menu of long-term (nominal) mortgage loa...

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Bibliographic Details
Published in:Review of economic dynamics 2009-07, Vol.12 (3), p.444-468
Main Authors: Chambers, Matthew S., Garriga, Carlos, Schlagenhauf, Don
Format: Article
Language:English
Subjects:
Borrowing
Economic models
Equilibrium models
First-time buyers
Home loans
Households
Housing finance
Housing market
Inflation
Life cycles
Life-cycle
Mortgage markets
Mortgages
Studies
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Summary:The objective of this paper is to understand how loan structure 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 households can choose from a menu of long-term (nominal) mortgage loans. The model accounts for observed patterns in housing consumption, ownership, and portfolio allocations. We find 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 and that loan products with low initial payments offer an alternative to mortgages with no downpayment. These effects are more important when inflation is low. The presence of inflation reduces the real value of the mortgage payment and the outstanding loan over time reducing mobility. Changes in the structure of mortgages have implications for risk sharing.
ISSN:1094-2025
1096-6099
DOI:10.1016/j.red.2009.01.003