This paper provides theoretical results for the design of contracts used in the market for residential household mortgages and mortgage securities. Critical elements in the problem of immunizing systemic risk through efficient contract design are identified. Using an extension of classical immunization theory, this paper demonstrates that systemic risk of long amortization mortgage contracts is reduced when term to maturity of the contract at origination is significantly less than the amortization period. In addition, incorporating prepayment and limited recourse default options into the mortgage contract increases systemic risk when compared with full recourse mortgage contracts having yield maintenance prepayment penalties. The theoretical results are used to evaluate the systemic risk management problems that have plagued the US mortgage funding system.

(2016). Mortgage contract design and systemic risk immunization [journal article - articolo]. In INTERNATIONAL REVIEW OF FINANCIAL ANALYSIS. Retrieved from http://hdl.handle.net/10446/32066

Mortgage contract design and systemic risk immunization

ZANOTTI, Giovanna
2016-01-01

Abstract

This paper provides theoretical results for the design of contracts used in the market for residential household mortgages and mortgage securities. Critical elements in the problem of immunizing systemic risk through efficient contract design are identified. Using an extension of classical immunization theory, this paper demonstrates that systemic risk of long amortization mortgage contracts is reduced when term to maturity of the contract at origination is significantly less than the amortization period. In addition, incorporating prepayment and limited recourse default options into the mortgage contract increases systemic risk when compared with full recourse mortgage contracts having yield maintenance prepayment penalties. The theoretical results are used to evaluate the systemic risk management problems that have plagued the US mortgage funding system.
articolo
2016
Poitras, Geoffrey; Zanotti, Giovanna
(2016). Mortgage contract design and systemic risk immunization [journal article - articolo]. In INTERNATIONAL REVIEW OF FINANCIAL ANALYSIS. Retrieved from http://hdl.handle.net/10446/32066
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10446/32066
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