Alternative mortgage products were identified by many as culprits in the financial crisis. However, because of their lower initial mortgage payments relative to loan amount, they may be a valuable tool for households who expect higher and more certain future labor income, and who wish to smooth...

This paper solves a dynamic model of a household's decision to default on its mortgage, taking into account labor income, house price, inflation, and interest rate risk. Mortgage default is triggered by negative home equity, which results from declining house prices in a low inflation...

Alternative mortgage products are commonly characterized by initial lower mortgage payments, followed by larger payments later on. As a consequence they may be a valuable tool for households who expect higher future labor income, and wish to smooth consumption over the life-cycle. I propose a...