(from newswire.net source Alan Gray:)
“Ingram’s new Mortgage Model has three versions: 1. Defined Cost Model – the rate at which payments reduce compared to average incomes is fixed in advance. 2. Hybrid Model – the mortgage begins normally but a rescue option converts it to the safer ILS Model if interest rates rise too high. This can be used in economic recovery mode. 3. Adjustable Rate Model – the rate at which payments fall relative to incomes is variable. Traditional Fixed Interest Mortgages can be a problem, costing more interest, and not reducing payments if incomes are not rising. This is a significant problem in some austerity economies.”
Certainly, looking at the (almost) complete ILS system, it can be said that the design itself is ‘stabilizing’ towards eliminating both sides of amplification effects of change, IOW reducing the disruptive effects of positive feedback loops, created generally by wide currency speculations or economic bubbles downturns, from the design, you can tell Edward is an Engineer. 😉
IMVHO the design could even be further strengthened with a second stage of equity based reverse mortgage, reducing defaults in extending a way to cover minimum payments for short periods of low cash-flow, and/or even using a variable length lease modeled over the ILS philosophy, in a way that both the lender and the holder may resolve the contract ‘rapidly,’ with minimal burden from either sides. The later could also avoid enormous expenses from the side of lenders, and leave the borrowers in the market, which the current system of foreclosure, at least in the US, does not for neither.
The current system design was not intended for exceptional circumstances such as depressions, whereas 40% of the population finds itself condemned credit-wise for a decade or in perpetual, off the market, while at the same time lenders find themselves spending half the value of the recovered collateral in useless paper-pushing and rubber-stamping bureaucracy steps. Also, that ‘condemned 40%’ in the current faulty system, is ‘subtracted’ from the market, with catastrophic effects on demand.