A Model of Mortgage Default

John Campbell and Joao F. Cocco

Scholarly Articles from Harvard University Department of Economics

Abstract: 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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Citations: View citations in EconPapers (140)

Published in The Journal of Finance

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http://dash.harvard.edu/bitstream/handle/1/30758219/mortdefault13022014.pdf (application/pdf)

Related works:
Journal Article: A Model of Mortgage Default (2015)
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:hrv:faseco:30758219

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