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Embedded Options in the Mortgage Contract

Brent Ambrose and Richard Buttimer

The Journal of Real Estate Finance and Economics, 2000, vol. 21, issue 2, 95-111

Abstract: Loss mitigation is the process by which lenders attempt to minimize losses associated with foreclosure. As competition increases in the mortgage industry, lenders and servicers are under great pressure to adopt loss mitigation tactics rather than simply use foreclosure as the means of dealing with borrowers in default. This study presents a mortgage-pricing model that fully specifies all borrower options with respect to default, including the ability to reinstate the mortgage out of default. We document the impact of various loss mitigation programs, including forbearance and antideficiency judgments, as well as the value of credit on borrower default behavior. Copyright 2000 by Kluwer Academic Publishers

Date: 2000
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Working Paper: Embedded Options in the Mortgage Contract (1998)
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The Journal of Real Estate Finance and Economics is currently edited by Steven R. Grenadier, James B. Kau and C.F. Sirmans

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