Template-Type: ReDIF-Paper 1.0

Author-Name: Chiara Forlati
Author-X-Name-First: Chiara
Author-X-Name-Last: Forlati
Author-Email: chiara.forlati@epfl.ch
Author-Workplace-Name: Chair of International Finance, Ecole Polytechnique Federale de Lausanne (EPFL), Switzerland

Author-Name: Luisa Lambertini 
Author-X-Name-First: Luisa
Author-X-Name-Last: Lambertini
Author-Email: luisa.lambertini@epfl.ch
Author-Workplace-Name: Chair of International Finance, Ecole Polytechnique Federale de Lausanne (EPFL), Switzerland


Title: Mortgage Amortization and Amplification
Abstract: Mortgages characterized by negative or low early amortization schedules amplify the macroeconomic effects of a housing risk shock. We analyze the role of mortgage amortization in a two-sector DSGE model with housing risk and endogenous default. Mortgage loan contracts extend to two periods and have adjustable rates. The fraction of principal to be repaid in the first period can vary. As the fraction of principal to be paid in the first period falls, steady-state mortgages and leverage increase and the impact of a housing risk shock on consumption and output is amplified. Borrowers prefer negative amortization. If free to choose the amortization schedule, borrowers would repay most of the principal in the last period of the contract. Low early repayments of principal allow borrowers to hold on to their housing stock and postpone default to the second period having incurred small sunk costs.
Length: 45 pages		
Creation-Date: 2012-02
Revision-Date:2012-02
Publication-Status: 
File-URL: http://infoscience.epfl.ch/record/175016/files/CFP2012_01.pdf
Number:
Classification-JEL: E32, E44, G01, R31
Keywords: Housing, Mortgage default, Mortgage risk
Handle: RePEc:cif:wpaper:201201