Alternative Mortgage Instruments, the Tilt Problem, and Consumer Welfare

Alm, James; Follain, James R.

doi:10.2307/2331005

Cited by 64 publications

(45 citation statements)

References 16 publications

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“…Other economic mechanisms could, however, be also at work. An increase in inflation, and therefore in the nominal mortgage rate, can make liquidity constraints faced by agents more binding, lowering housing demand and prices (Alm and Follain, 1984). Moreover, money illusion may magnify the impact of inflation on asset prices (see Brunnermeier and Julliard, 2008, for an application to the house market).…”

Section: The Impact Of Macroeconomic Shocksmentioning

confidence: 99%

International house prices and macroeconomic fluctuations

Beltratti

Morana

2010

Journal of Banking & Finance

167

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Section: The Impact Of Macroeconomic Shocksmentioning

confidence: 99%

International house prices and macroeconomic fluctuations

Beltratti

Morana

2010

Journal of Banking & Finance

167

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“…This interest rate can be fixed over a long period of time or regularly adjusted, but either way, the construction of the payments of the loan is overall the same. This is in contrast to the U.S. mortgage market, where a wider variety of repayment profiles are offered, see, e.g., Alm and Follain [21] for a description of three alternative repayment profiles in the U.S. In the following sections, we first describe the general structure of these interest rate profile mortgages and then continue to specify special cases considered to represent stylized versions of a typical FRM and ARM.…”

Section: Stylized Mortgage Productsmentioning

confidence: 99%

Portfolio Optimization and Mortgage Choice

Nordfang

Steffensen

2017

JRFM

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This paper studies the optimal mortgage choice of an investor in a simple bond market with a stochastic interest rate and access to term life insurance. The study is based on advances in stochastic control theory, which provides analytical solutions to portfolio problems with a stochastic interest rate. We derive the optimal portfolio of a mortgagor in a simple framework and formulate stylized versions of mortgage products offered in the market today. This allows us to analyze the optimal investment strategy in terms of optimal mortgage choice. We conclude that certain extreme investors optimally choose either a traditional fixed rate mortgage or an adjustable rate mortgage, while investors with moderate risk aversion and income prefer a mix of the two. By matching specific investor characteristics to existing mortgage products, our study provides a better understanding of the complex and yet restricted mortgage choice faced by many household investors. In addition, the simple analytical framework enables a detailed analysis of how changes to market, income and preference parameters affect the optimal mortgage choice.

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“…Portfolio rebalancing would predict a positive relationship between excess liquidity and asset prices, as the increased liquidity would be allocated to the various assets, increasing their demand and price; moreover, from the present value model, a reduction in the interest rate leads to lower discounting of the flow of expected future dividends (rents), increasing stock (house) prices; finally, a contraction in the mortgage rate can ease liquidity constraints, boosting housing demand and prices (Alm and Follain, 1984). Other linkages may also operate, as higher asset prices may boost the value of firms' collateral, increasing their borrowing ability, and at the same time improving the balance sheets of financial institutions and increasing leverage.…”

Section: Financial Linkagesmentioning

confidence: 99%

The Great Recession: US dynamics and spillovers to the world economy

Bagliano

Morana

2012

Journal of Banking & Finance

106

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a b s t r a c tThis paper provides an empirical investigation of both the within-US and international channels of transmission of macroeconomic and financial shocks by means of a 50-country macroeconometric model (estimated over the 1980-2009 period), including measures of excess liquidity and financial fragility, specifically designed in order to evaluate the relevance of the boom-bust credit cycle view put forward as an interpretation of the recent ''Great Recession'' episode. We find that such a view is consistent with the empirical evidence. Moreover, concerning the real effects of financial shocks within the US, we detect stronger evidence of an asset prices channel, rather than a liquidity channel. Concerning the spillovers to the world economy, we find that while financial disturbances are transmitted to foreign countries through US house and stock price dynamics, as well as excess liquidity creation, the trade channel is the key trasmission mechanism of real shocks.

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Alternative Mortgage Instruments, the Tilt Problem, and Consumer Welfare

Cited by 64 publications

References 16 publications

International house prices and macroeconomic fluctuations

International house prices and macroeconomic fluctuations

Portfolio Optimization and Mortgage Choice

The Great Recession: US dynamics and spillovers to the world economy

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