Continuous Workout Mortgages
This paper models Continuous Workout Mortgages (CWMs) in an economic environment with refinancings and prepayments by employing a market-observable variable such as the house price index of the pertaining locality. The authors' main results include: explicit modelling of repayment and interest-only CWMs; closed form formulae for mortgage payment and mortgage balance of a repayment CWM; a closed form formula for the actuarially fair mortgage rate of an interest-only CWM. For repayment CWMs they extend their analysis to include two negotiable parameters: adjustable "Workout proportion" and adjustable "Workout threshold." These results are of importance as they not only help understanding the mechanics of CWMs and estimating key contract parameters.