The Co-Co Mortgage

With mortgages, prices rise => people have more equity => can trade-up => borrow more and it accelerates.  Also reverses on the downside (as we have seen with the crisis.) So, can one create a system where repayment accelerates when prices rise (to slow down the accelerator effect). i.e. structure the mortgage so that as prices rise people pay down more off the debt with the extra equity rather than buying SUVs? Similar idea as the symmetric bond scheme in Denmark.

In general. co-co bonds make me wonder.  If one thinks of contingent capital as debt that converts to equity if a bank’s equity capital cushion falls below a threshold, then the bondholders become shareholders at a time when it is bad to become one (a shareholder). And the bond’s price should reflect this risk.

FT alphaville

C0-Co Nuts

Tett FT Column 11-09