Reducing the Impact of Real Estate Foreclosures with Amortizing Participation Mortgages

Wojakowski, R.M.; Ebrahim, M.S.; Shackleton, M.B.

Abstract

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.

Citation

Wojakowski, R., Ebrahim, M., & Shackleton, M. (2016). Reducing the Impact of Real Estate Foreclosures with Amortizing Participation Mortgages. Journal of Banking and Finance, 71, 62-74. https://doi.org/10.1016/j.jbankfin.2016.05.005

• Journal Article Type: Article
• Acceptance Date: May 14, 2016
• Online Publication Date: Jun 24, 2016
• Publication Date: Oct 1, 2016
• Deposit Date: May 18, 2016
• Publicly Available Date: Dec 24, 2017
• Journal: Journal of Banking and Finance
• Print ISSN: 0378-4266
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 71
• Pages: 62-74
• DOI: https://doi.org/10.1016/j.jbankfin.2016.05.005
• Public URL: https://durham-repository.worktribe.com/output/1404450