Economics, Econometrics and Finance
8 years ago

Mortgage contracts favoring higher risk for borrowers found optimal.

Real Estate Economics
Optimal Sharing of Interest‐Rate Risk in Mortgage Contracts: The Effects of Potential Prepayment and Default
Jan K. Brueckner, Kangoh Lee

Paper Summary

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The article explores how mortgage contracts can be designed to share interest-rate risk effectively. By analyzing different scenarios of mortgage termination, the researchers found that potential prepayment or default by borrowers leads to higher risk exposure being optimal in mortgage contracts.