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413 sats \ 7 replies \ @SimpleStacker 21 Aug \ on: On the Economics of Peer-to-Peer, pt 2: The Stubborn Issue of Indexation bitcoin econ

You know, my dissertation was actually about indexation in mortgages (tying the mortgage balance to house price indexes)

I think people could oppose indexation for a number of reasons:

  • Trust / complexity. Adding indexation to a contract adds complexity, and it may appear to add a dimension for manipulation. I don't necessarily buy this argument because people sign up for all sorts of complex contracts without fully understanding what they're buying. Universal Life comes to mind.
  • Complexity / cost. Administration of an indexed contract could be more costly, if disputes arise as to how the index is constructed. If the contract is not written well, a dispute could arise if, for example, the way the index is measured changes over the life of the contract, or if the way source data is measured changes.
  • Amplified risk on the edge. In the mortgage example, indexing your mortgage to house prices might make sense if your house always moves with the index. But if somehow the index rises while your own hyper-localized neighborhood prices fall, you are doubly screwed.
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48 sats \ 6 replies \ @denlillaapan OP 21 Aug

woaaah, incredible.

Repurpose some of it for us lil plebs here at ~econ?!

Would love to get into it more seriously. Thinking about reading the Shiller paper in detail (only read extracts at uni)

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54 sats \ 5 replies \ @SimpleStacker 21 Aug

Eh, I doubt stackers would be interested in this one. It's an example of how I don't want to write econ papers anymore, and it's my least favorite of my academic works. It was basically a mathematical model of mortgage repayment and default, which was then used to simulate outcomes if the mortgages had instead been indexed to house prices. It's an overly quantitative, modeling based approach that I no longer favor. It kind of reflects the tastes and trends which were popular in my phd program at the time.

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48 sats \ 4 replies \ @denlillaapan OP 21 Aug

Intro/lit review salvageable...?

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112 sats \ 3 replies \ @SimpleStacker 21 Aug

The thesis itself is pretty straightforward. What if the predominant type of mortgage had been a shared appreciation mortgage (SAM)---mortgages whose balance is indexed to the price of the home?

The motivation was that the GFC precipitated by foreclosures, which generally require two things to be true: 1. inability/unwillingness to pay, and 2. underwater on the loan. If borrowers weren't underwater, there wouldn't be as many value-destroying foreclosures.

What if the mortgages had been indexed to house prices? Then, house prices going down wouldn't trigger the underwater condition and there wouldn't have been a wave of foreclosures. Moreover, when house prices were expected to appreciate, the lender can make the SAM at very favorable terms because they expect to receive some of that appreciation. Many borrowers who are liquidity constrained would presumably be willing to trade some of the house price upside for more favorable terms upfront, like lower payments or lower LTV requirements.

The paper built a quantitative model to simulate outcomes had this been the case and do welfare calculations.

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48 sats \ 2 replies \ @Undisciplined 22 Aug

It seems like lenders would potentially be able to take a pretty huge loss if the principle could tank 80% in a housing crash.

Wouldn't that have rather severe downstream implications?

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32 sats \ 1 reply \ @SimpleStacker 22 Aug

They were already taking huge writedowns anyway, due to the homes being underwater and the mortgages not being repaid / entering foreclosure.

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6 sats \ 0 replies \ @Undisciplined 22 Aug

True. Do you think it would more or less be a wash?

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