Automatic Workout Mortgage and Housing Consumption Choice

This paper further develops the Automatic Workout Mortgage (AWM) which embeds an insurance put option to reduce negative equity, systemic risk and promote economic recovery. We introduce a mathematical model showing that AWM raises household utility and increases housing demand. Without AWM, households stabilize at about 40% equity when considering reverse mortgages; with AWM, demand peaks at 80%. The insurance feature lowers precautionary saving, making housing more attractive to risk‐averse borrowers. AWM boosts expected utility by roughly 33% of optimal housing consumption without AWM and protects home equity, improving future housing affordability and retirement‐phase resilience.