Mortgages as Recursive Contracts

Valuing Individual Mortgage Servicing Contracts: A Comparison between Adjustable Rate Mortgages and Fixed Rate Mortgages

This study constructs a valuation model from which an option-adjusted spread approach is employed to value individual mortgage servicing contracts for both adjustable rate and fixed rate mortgages. The valuation model is comprised of an exogenous OTS prepayment model, a stochastic interest rate process, and other servicing fees and costs, all of which jointly determine the servicing contract’s ...

Recursive contracts, lotteries and weakly concave Pareto sets

Marcet and Marimon (1994, revised 1998) developed a recursive saddle point method which can be used to solve dynamic contracting problems that include participation, enforcement and incentive constraints. Their method uses a recursive multiplier to capture implicit prior promises to the agent(s) that were made in order to satisfy earlier instances of these constraints. As a result, their method...

The New Palgrave Dictionary of Economics Online recursive contracts

A number of dynamic models in economics are formulated with forward-looking elements in the constraints – for example, models of risk-sharing with participation constraints and models of optimal policy. Here, standard dynamic programming does not apply. Recent contributions show how to reformulate these models by either rewriting the forward-looking constraints (promised utility approach) or by...

A Treatise on Mortgages

Unobservable contracts as precommitments

It is well known that signing publicly observable contracts with third parties is a means of credibly committing to certain actions and hence may yield strategic advantages. Previous work on the commitment value of unobservable contracts has been limited to normal form games and extensive form games in which only one party has the option to sign a contract. In this paper, we extend the analysis...