Unraveling the Real-Payment Twist

Michael C. Lovell

MCL

Michael C. Lovell

Two GROUPS in U.S. society have been particularly hard pressed by
inflation: potential first-time homeowners and people in retirement. A
major problem for these two groups arises from the failure of financial institutions
to provide mortgages and pensions suitable to the current inflationary,
environment. The first section of this paper shows that, while the
variable-rate mortgage and the shared-appreciation mortgage-two principal
innovations in mortgage financing-may meet certain needs of traditional
mortgage lenders, they do not address the difficulties that the
conventional level-payment mortgage creates for first-time homeowners.
The second section illustrates the difficulties that level-payment pensions
and annuities create for retirees and contrasts them with indexed pensions.
The third section explains how the development of both indexed
mortgages and pensions might be encouraged by exploiting the symmetry
between them. In important respects, indexed pensions are the mirror of
indexed mortgages, so that the creation of one would facilitate creation of
the other. With only enabling federal legislation, financial intermediaries
and markets should be capable of creating both, thus easing much of the
hardship of inflation for major groups in society.