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Keywords = mortgage contract design

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18 pages, 338 KB  
Article
Housing Market Bubbles and Mortgage Contract Design: Implications for Mortgage Lenders and Households
by Geoffrey Poitras and Giovanna Zanotti
J. Risk Financial Manag. 2018, 11(3), 42; https://doi.org/10.3390/jrfm11030042 - 17 Jul 2018
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Abstract
This paper explores the implications of a housing market bubble for three critical elements of mortgage contract design: difference between term to maturity and amortization period; prepayment options; and, lender recourse in the event of default. Using an extension of classical immunization theory, [...] Read more.
This paper explores the implications of a housing market bubble for three critical elements of mortgage contract design: difference between term to maturity and amortization period; prepayment options; and, lender recourse in the event of default. Using an extension of classical immunization theory, this paper provides equilibrium conditions demonstrating the risk reduction benefits of shorter term to contract maturity at origination for lenders of long amortization mortgage contracts. In addition, the risks of underpricing prepayment and no recourse default options in the mortgage contract when compared with full recourse mortgage contracts having yield maintenance prepayment penalties are explored by contrasting the ability of US and Canadian mortgage funding systems to withstand a housing market bubble collapse that might occur. Full article
(This article belongs to the Special Issue Housing Market Bubbles, Credit and Crashes)
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