College of Business
University of Illinois
340 Wohlers Hall
Champaign, 6182 IL
Institutional Affiliation: University of Illinois at Urbana-Champaign
NBER Working Papers and Publications
|May 2017||An Equilibrium Model of Housing and Mortgage Markets with State-Contingent Lending Contracts|
with Tomasz Piskorski: w23452
We develop a tractable general equilibrium framework of housing and mortgage markets with aggregate and idiosyncratic risks, costly liquidity and strategic defaults, empirically relevant informational asymmetries, and endogenous mortgage design. We show that adverse selection plays an important role in shaping the form of an equilibrium contract. If borrowers' homeownership values are known, aggregate wages and house prices determine the optimal state-contingent mortgage payments, which efficiently reduces the costs of liquidity default. However, when lenders are uncertain about homeownership values, the equilibrium contract only depends on house prices and takes the form of a home equity insurance mortgage (HEIM) that eliminates the strategic default option and insures the borrower's equi...
|December 2010||The Inefficiency of Refinancing: Why Prepayment Penalties Are Good for Risky Borrowers|
with Christopher J. Mayer, Tomasz Piskorski: w16586
This paper explores the practice of mortgage refinancing in a dynamic competitive lending model with risky borrowers and costly default. We show that prepayment penalties improve welfare by ensuring longer-term lending contracts, which prevents the mortgage pools from becoming disproportionately composed of the riskiest borrowers over time. Mortgages with prepayment penalties allow lenders to lower mortgage rates and extend credit to the least creditworthy, with the largest benefits going to the riskiest borrowers, who have the most incentive to refinance in response to positive credit shocks. Empirical evidence from more than 21,000 non-agency securitized fixed rate mortgages is consistent with the key predictions of our model. Our results suggest that regulations banning refinancing pena...
Published: Mayer, Christopher, Tomasz Pisk orski, and Alexei Tchistyi. 2013 . “The Inefficiency of Refinancing: Why Prepayment Penalties Are Good f or Risky Borro wers.” Journal of Financial Economics , Vol. 107(2), 694 - 714.