Privatized Default Risk and Real Estate Recessions: The U.K. Mortgage Market

Peter Chinloy

Real Estate Economics, 1995, vol. 23, issue 4, 401-420

Abstract: A mortgage pricing model is developed when a borrower goes through a series of distress states, including delinquency, long‐term nonpayment and ultimate default. These steps are sequential, and depend on prices and alternatives faced by the borrower. The multistate default model is applied to the mortgage market in the United Kingdom. As a byproduct, a pricing structure for the U.K. endowment mortgage, which combines a good and a life insurance policy, is developed. Income and liquidity constraints are shown to affect the decision to keep a mortgage current in different states of distress. Solvent borrowers may thus keep their mortgages current, even when equity is negative.

Date: 1995
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