ABSTRACT 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.
Shiller et al. (Sun,) studied this question.