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Shared-Appreciation Mortgages and Uninsurable Idiosyncratic Shocks

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  • Cóndor Richard

Abstract

Shared-appreciation mortgage (SAM) contracts, which display payments indexed to a local house price, have been proposed as an alternative to alleviate the costs of recessions. Using a heterogeneous agent model with two types of agents (Borrowers and Savers), uninsurable idiosyncratic income risk, and calibrated to the US, this paper studies the effects, on both macroeconomic variables and welfare, of introducing such contracts. I find that equilibrium default rates, house price volatility, and welfare losses of both Borrowers and Savers following an unexpected negative shock on aggregate income, are smaller. Also, while this policy benefits Savers, only Borrowers with moderate/low mortgage and housing wealth levels are better-off (61% of Borrowers under the main calibration). Finally, if Borrowers are less patient, the fraction that benefits may never be above 50%.

Suggested Citation

  • Cóndor Richard, 2020. "Shared-Appreciation Mortgages and Uninsurable Idiosyncratic Shocks," Working Papers 2020-11, Banco de México.
    • Handle: RePEc:bdm:wpaper:2020-11
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    File URL: https://www.banxico.org.mx/publications-and-press/banco-de-mexico-working-papers/%7B9147B7EE-C25B-FB51-C6C3-5537148BEE24%7D.pdf
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    References listed on IDEAS

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    Cited by:

    1. Cóndor Richard & Oviedo Moguel Rodolfo, 2023. "House Prices and the Distribution of Wealth Around the Great Recession," Working Papers 2023-04, Banco de México.

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    More about this item

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G00 - Financial Economics - - General - - - General

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