Abstract
Mortgages are priced alone two dimensions – the interest rate and the leverage. This paper develops a simple model of a mortgage contract, in which differences in the borrower and the lender’s risk preference jointly determine the equilibrium interest rate and leverage. This model provides novel predictions, including counter-cyclical leverage of real estate: loan to value ratios of newly generated mortgages should be higher when property values are lower. Co-integration tests on commercial mortgage data provide generally supporting evidence for the predictions, and the evidence on counter-cyclical leverage is very strong both statistically and economically.
Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
