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Reducing the Impact of Real Estate Foreclosures with Amortizing Participation Mortgages1

Wojakowski, RM, Shahid Ebrahim, M and Shackleton, MB (2016) Reducing the Impact of Real Estate Foreclosures with Amortizing Participation Mortgages1 Journal of Banking and Finance, 71. pp. 62-74.

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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.

Item Type: Article
Subjects : Surrey Business School
Authors :
AuthorsEmailORCID
Wojakowski, RMUNSPECIFIEDUNSPECIFIED
Shahid Ebrahim, MUNSPECIFIEDUNSPECIFIED
Shackleton, MBUNSPECIFIEDUNSPECIFIED
Date : 24 June 2016
Identification Number : 10.1016/j.jbankfin.2016.05.005
Copyright Disclaimer : © 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/
Uncontrolled Keywords : Dodd-Frank Act, Foreclosure, Home loan modifications, Prepayment, Default, Partial amortization, Commercial mortgage, Residential mortgage, Shared income mortgage, Indexation.
Depositing User : Symplectic Elements
Date Deposited : 18 May 2016 18:00
Last Modified : 20 Jul 2016 10:52
URI: http://epubs.surrey.ac.uk/id/eprint/810756

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