Economics, Econometrics and Finance
4 years ago

Mortgage contracts favor higher risk exposure for borrowers, study finds.

SSRN Electronic Journal
Optimal Risk-Sharing 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 risks between borrowers and lenders. By analyzing different scenarios of mortgage termination, the researchers found that higher risk exposure for borrowers is optimal when potential termination through prepayment or default is considered.