A Model of Mortgage Default
John Campbell () and
João F. Cocco
Journal of Finance, 2015, vol. 70, issue 4, 1495-1554
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.
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Working Paper: A model of mortgage default (2014)
Working Paper: A Model of Mortgage Default (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:70:y:2015:i:4:p:1495-1554
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