A model of mortgage default
John Campbell () and
João F. Cocco
No 452, CFS Working Paper Series from Center for Financial Studies (CFS)
This paper solves a dynamic model of households' mortgage decisions incorporating labor income, house price, inflation, and interest rate risk. It uses a zero-profit condition for mortgage lenders to solve for equilibrium mortgage rates given borrower characteristics and optimal decisions. The model quantifies the effects of adjustable vs. fixed mortgage rates, loan-to-value ratios, and mortgage affordability measures on mortgage premia and default. Heterogeneity in borrowers' labor income risk is important for explaining the higher default rates on adjustable-rate mortgages during the recent US housing downturn, and the variation in mortgage premia with the level of interest rates.
Keywords: household finance; loan to value ratio; loan to income ratio; mortgage affordability; negative home equity; mortgage premia (search for similar items in EconPapers)
JEL-codes: G21 E21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-dge and nep-mac
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Journal Article: A Model of Mortgage Default (2015)
Working Paper: A Model of Mortgage Default (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfswop:452
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