Simulate and Optimise: A two-layer mortgage simulator for designing novel mortgage assistance products
This work addresses the need for cost-effective design of mortgage relief products for households and financial institutions, though it is incremental as it builds on existing simulation methods.
The authors tackled the problem of designing mortgage assistance products by developing a two-layer simulator that models household resilience to income shocks and optimizes product strategies, showing it can successfully design products to improve resilience and balance costs, previously requiring expensive pilot studies.
We develop a novel two-layer approach for optimising mortgage relief products through a simulated multi-agent mortgage environment. While the approach is generic, here the environment is calibrated to the US mortgage market based on publicly available census data and regulatory guidelines. Through the simulation layer, we assess the resilience of households to exogenous income shocks, while the optimisation layer explores strategies to improve the robustness of households to these shocks by making novel mortgage assistance products available to households. Households in the simulation are adaptive, learning to make mortgage-related decisions (such as product enrolment or strategic foreclosures) that maximize their utility, balancing their available liquidity and equity. We show how this novel two-layer simulation approach can successfully design novel mortgage assistance products to improve household resilience to exogenous shocks, and balance the costs of providing such products through post-hoc analysis. Previously, such analysis could only be conducted through expensive pilot studies involving real participants, demonstrating the benefit of the approach for designing and evaluating financial products.