Financing affordable and sustainable homeownership with Fixed-COFI mortgages

Publication date: Available online 12 August 2018Source: Regional Science and Urban EconomicsAuthor(s): By Wayne Passmore, Alexander H. von HafftenAbstractThe 30-year fixed-rate fully amortizing mortgage (or “traditional fixed-rate mortgage”) was a substantial innovation when first developed during the Great Depression; however, it has three major flaws. First, homeowner equity accumulates slowly during the first decade. Many lenders require large down payments because of slow equity accumulation. Second, in each monthly mortgage payment, homeowners substantially compensate capital markets investors for the ability to prepay. The homeowners might have better uses for this money. Third, refinancing mortgages is often very costly. Expensive refinancing may prevent homeowners from taking advantage of falling rates.To resolve these three flaws, we propose a new fixed-rate mortgage, called the Fixed-Payment-COFI mortgage (or “Fixed-COFI mortgage”). This mortgage has fixed monthly payments equal to payments for traditional fixed-rate mortgages and does not require a down payment. Also, unlike traditional fixed-rate mortgages, Fixed-COFI mortgages do not bundle mortgage financing with compensation paid to capital markets investors for bearing prepayment risks; instead, this money is directed toward lower monthly payments or toward purchasing the home. The Fixed-COFI mortgage exploits the often-present prepayment-risk “wedges” between the fixed-rate mortgage rate and the ...
Source: Regional Science and Urban Economics - Category: Science Source Type: research