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Mortgages – FPM, VPM. Mortgages. Borrow $ because property owner wants the money NOW. Put the property up as security for the loan.

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Presentation Transcript
mortgages
Mortgages
  • Borrow $ because property owner wants the money NOW.
  • Put the property up as security for the loan.
  • Mortgage = A loan to finance the purchase of real estate, usually with specified payment periods and interest rates. The borrower (mortgagor) gives the lender (mortgagee) a lien on the property as collateral for the loan.
simple multi period fp model
Simple Multi-period FP Model

Optimize with respect to h and z.

fp mortgage eq m
FP Mortgage Eq’m

In contrast to more flexible analysis, consumer optimizes w.r.t. discounted average price ratio.

Opportunity to save or borrow allows MU of income to converge.

simple multi period vp model
Simple Multi-Period VP Model

Optimize with respect to hi, ciand zi.

parameters
Parameters

Moving cost = 1

fp mortgage no moves
FP – Mortgage – No Moves

FP – Mortgage – Moves

VP – Mortgage – No Moves

what are the differences
What are the differences?
  • Compensating variation (take money) = 2.310
  • Equivalent variation (give money) = 2.060
what does it all mean
What does it all mean?
  • FPM frontloads payments.
  • VPM evens out payments. Leads to information problems.
  • We can do something with this by requiring people to stay in the house with a pre-payment penalty.
  • Solves the information problem as to who really wants to stay in the house.
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