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A Model of Mortgage Default

John Campbell () and João F. Cocco

Journal of Finance, 2015, vol. 70, issue 4, 1495-1554

Abstract: type="main"> In this paper, we solve a dynamic model of households' mortgage decisions incorporating labor income, house price, inflation, and interest rate risk. Using a zero-profit condition for mortgage lenders, we solve for equilibrium mortgage rates given borrower characteristics and optimal decisions. The model quantifies the effects of adjustable versus fixed mortgage rates, loan-to-value ratios, and mortgage affordability measures on mortgage premia and default. Mortgage selection by heterogeneous borrowers helps explain the higher default rates on adjustable-rate mortgages during the recent U.S. housing downturn, and the variation in mortgage premia with the level of interest rates.

Date: 2015
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Working Paper: A model of mortgage default (2014) Downloads
Working Paper: A Model of Mortgage Default (2011) Downloads
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