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| PLAM Default Risk Author: Peter J. Elmer Start Page: 157 Abstract: This article combines
cross-sectional time series data on real estate appreciation rates during the 1974 to 1989
period with an option-based model of mortgage default to simulate the default and loss
characteristics of price level-adjusted mortgages (PLAMs) and standard fixed-payment
mortgages (FPMs). The analysis finds significantly higher default risk for PLAMs than
recognized by previous research. In particular, the expected loss of twenty- and
thirty-year PLAMs with common initial loan-to-value (LTV) ratios is two to seven times
higher than the expected loss of comparable FPMs and these PLAMs have much longer periods
of high default risk than FPMs. Maturity must be reduced to fifteen years in order to
bring PLAM default risk approximately in line with FPM default risk for most LTVs. |
