Simulate and Optimise: A two-layer mortgage simulator for designing novel mortgage assistance products

TL;DR

This paper introduces a two-layer simulation and optimization framework for designing innovative mortgage assistance products that enhance household resilience to income shocks, reducing reliance on costly real-world pilot studies.

Contribution

The paper presents a novel two-layer approach combining multi-agent simulation and optimization to design mortgage relief products, calibrated to the US market.

Findings

Successfully designed mortgage assistance products that improve household resilience.

Demonstrated the approach's ability to evaluate product costs and benefits.

Reduced need for expensive pilot studies in financial product design.

Abstract

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.