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    政大機構典藏 > 商學院 > 財務管理學系 > 期刊論文 >  Item 140.119/61538
    Please use this identifier to cite or link to this item: http://nccur.lib.nccu.edu.tw/handle/140.119/61538

    Title: Optimal Mortgage Contract Choice Decision in the Presence of the Pay Option Adjustable Rate and the Balloon Mortgage
    Authors: 姜堯民
    Chiang, Yao-Min;Sa-Aadu , Jarjisu
    Contributors: 財管系
    Keywords: Mortgage choice;balloon mortgages;risk management;household mobility
    Date: 2013.01
    Issue Date: 2013-11-08 11:59:44 (UTC+8)
    Abstract: The unprecedented run-up in global house prices of the 2000s was preceded by a revolution in U.S. mortgage markets in which borrowers faced a plethora of mortgages to choose from collectively known as nontraditional mortgages (NTMs), whose poor performance helped ignite the global financial crisis in 2007. This paper studies the choice of mortgage contracts in an expanded framework where the menu of contracts includes the pay option adjustable rate mortgage (PO-ARM), and the balloon mortgage (BM), alongside the traditional long horizon fixed rate mortgage (FRM) and the short horizon regular ARM. The inclusion of the PO-ARM is based on the fact it is the most controversial and perhaps the riskiest of the NTMs, whereas the BM has not been analyzed in the literature despite its different risk-sharing arrangement and long vintage. Our inclusive model relates the structural differences of these contracts to the horizon risk management problems and affordability constraints faced by the households that differ in terms of expected mobility. The numerical solutions of the model generates a number of interesting results suggesting that households select mortgage contracts to match their horizon, manage horizon risk and mitigate liquidity or affordability constraints they face. From a risk management and welfare perspectives, we find that the optimal contract for households with shorter horizons, specifically households who expect to move house once every one to two years, is the PO-ARM. The welfare advantage of the PO-ARM diminishes when the household’s horizon extends beyond 2 years at which point the BM becomes the more optimal contract up to 5-year horizon. The FRM is found to be the most suitable contract for relatively sedentary households who expect to move house once every six years and beyond. While the PO-ARM is found to dominate the FRM and BM, the dominance is not absolute. Overall, the results suggest that households are neither as risk averse as the selection of the FRM would suggest, nor are they as risk-seeking as the selection of PO- ARM or regular ARM would suggest. The results also suggest that the exuberance demonstrated for NTMs, especially PO-ARM, during the 2000s mortgage revolution may be both rational and irrational.
    Relation: Journal of Real Estate Finance and Economics, 0, 0
    Data Type: article
    Appears in Collections:[財務管理學系] 期刊論文

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