Pricing home mortgages and bank collateral: A rational expectations approach.

Ebrahim, Muhammed-Shahid; Mathur, Ike

Abstract

The efficiency of the housing finance system is of interest to homeowners, financial intermediaries and policy makers. We study the design of optimal mortgage contracts for risk-averse economic agents with access to symmetric information on the payoffs of a risky home. Our non-linear framework helps demonstrate the pareto-efficiency of a risk-free loan over its risky counterpart. It also allows us to evaluate the unique equilibrium interest rate, loan amount and home price in contrast to the capital structure theorems. Finally, we conduct numerical simulations (in lieu of comparative statics) to shed some light on the complex causal relationship between mortgage pricing parameters and the underlying collateral (i.e., home value).

Citation

Ebrahim, M., & Mathur, I. (2007). Pricing home mortgages and bank collateral: A rational expectations approach. Journal of Economic Dynamics and Control, 31(4), 1217-1244. https://doi.org/10.1016/j.jedc.2006.03.007

• Journal Article Type: Article
• Publication Date: 2007-04
• Deposit Date: Sep 25, 2014
• Journal: Journal of Economic Dynamics and Control
• Print ISSN: 0165-1889
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 31
• Issue: 4
• Pages: 1217-1244
• DOI: https://doi.org/10.1016/j.jedc.2006.03.007
• Public URL: https://durham-repository.worktribe.com/output/1423260