Structuring mortgages for macroeconomic stability

Cocco, J F, Campbell, J Y and Clara, N (2021) Structuring mortgages for macroeconomic stability. Journal of Finance, 76 (5). pp. 2525-2576. ISSN 0022-1082 OPEN ACCESS


We study mortgage design features aimed at stabilizing the macroeconomy. We model overlapping generations of mortgage borrowers and an infinitely lived risk-averse representative mortgage lender. Mortgages are priced using an equilibrium pricing kernel derived from the lender's endogenous consumption. We consider an adjustable-rate mortgage (ARM) with an option that during recessions allows borrowers to pay only interest on their loan and extend its maturity. We find that this maturity extension option stabilizes consumption growth over the business cycle, shifts defaults to expansions, and is welfare enhancing. The cyclical properties of the maturity extension ARM are attractive to a risk-averse lender so the mortgage can be provided at a relatively low cost.

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Item Type: Article
Subject Areas: Finance
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© 2021 American Finance Association & Wiley. This is the peer reviewed version of the following article: Cocco JF, Campbell JY, Clara, N: 'Structuring mortgages for macroeconomic stability', Journal of Finance which will be published in final form at This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions

Date Deposited: 27 Jan 2021 11:17
Date of first compliant deposit: 26 Jan 2021
Subjects: Mortgages
Business cycles
Last Modified: 12 Jul 2024 01:35

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