Before revision:  We also show that capital gain sharing features, through prepayment penalties in high house price states, are ineffective , as they virtually eliminate prepayment in such states. For typical foreclosure costs, we find that contracts with automatic balance adjustments become preferable to the traditional fixed rate mortgage at contract rate spreads of approximately 50-100 basis points , depending on how far prices must fall before adjustments are made.
After revision:  We also show that capital gain sharing features, through prepayment penalties in high house price states, are ineffective , as they virtually eliminate prepayment . For observed foreclosure costs, we find that contracts with automatic balance adjustments become preferable to the traditional fixed rate mortgage at contract rate spreads of approximately 50-100 basis points , depending on how far prices must fall before adjustments are made.