Optimal Mortgage Design

@inproceedings{Tchistyi2007OptimalMD,
  title={Optimal Mortgage Design},
  author={Alexei Tchistyi and Tomasz Piskorski},
  year={2007}
}
This article studies optimal mortgage design in a continuous-time setting with volatile and privately observable income, costly foreclosure, and a stochastic market interest rate. We show that the features of the optimal mortgage are consistent with an option adjustable-rate mortgage (option ARM). Under the optimal contract, the borrower is given discretion of how much to repay until his balance reaches a certain limit. The default rates and interest rate payment on the mortgage correlate… CONTINUE READING

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