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A model of mortgage default

John Campbell () and João F. Cocco

No 452, CFS Working Paper Series from Center for Financial Studies (CFS)

Abstract: 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
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5) Track citations by RSS feed

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https://www.econstor.eu/bitstream/10419/94372/1/78054143X.pdf (application/pdf)

Related works:
Journal Article: A Model of Mortgage Default (2015) Downloads
Working Paper: A Model of Mortgage Default (2011) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfswop:452

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