Mortgage default and mortgage valuation
AbstractWe study optimal exercise by mortgage borrowers of the option to default. Also, we use an equilibrium valuation model incorporating default to show how mortgage yields and lender recovery rates on defaulted mortgages depend on initial loan-to-value ratios when borrowers default optimally. The analysis treats both the frictionless case and the case in which borrowers and/or lenders incur deadweight costs upon default. The model is calibrated using data on California mortgages. We find that the model's principal testable implication for default and mortgage pricing—that default rates and yield spreads will be higher for high loan-to-value mortgages—is borne out empirically.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2009-20.
Date of creation: 2009
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-10-31 (All new papers)
- NEP-RMG-2009-10-31 (Risk Management)
- NEP-URE-2009-10-31 (Urban & Real Estate Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kristopher Gerardi & Adam Hale Shapiro & Paul S. Willen, 2007.
"Subprime outcomes: risky mortgages, homeownership experiences, and foreclosures,"
07-15, Federal Reserve Bank of Boston.
- Paul S. Willen & Adam Hale Shapiro & Kristopher Gerardi, 2008. "Subprime Outcomes: Risky Mortgages, Homeownership Experiences, and Foreclosures," 2008 Meeting Papers 345, Society for Economic Dynamics.
- Kristopher S. Gerardi & Andreas Lehnert & Shane M. Sherlund & Paul S. Willen, 2009.
"Making sense of the subprime crisis,"
2009-02, Federal Reserve Bank of Atlanta.
- Yongheng Deng & John M. Quigley & Robert Van Order, 2000.
"Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options,"
Econometric Society, vol. 68(2), pages 275-308, March.
- Yongheng Deng & John M. Quigley & Robert Van Order, . "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Zell/Lurie Center Working Papers 322, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
- Deng, Yongheng & Quigley, John M. & Van Order, Robert, 1999. "Mortgage Terminations, Heterogeneity, and the Exercise of Mortgage Options," Berkeley Program on Housing and Urban Policy, Working Paper Series qt96r560pg, Berkeley Program on Housing and Urban Policy.
- Atif Mian & Amir Sufi, 2008. "The Consequences of Mortgage Credit Expansion: Evidence from the 2007 Mortgage Default Crisis," NBER Working Papers 13936, National Bureau of Economic Research, Inc.
- Mark Doms & Fred Furlong & John Krainer, 2007. "Subprime mortgage delinquency rates," Working Paper Series 2007-33, Federal Reserve Bank of San Francisco.
- Coleman IV, Major & LaCour-Little, Michael & Vandell, Kerry D., 2008. "Subprime lending and the housing bubble: Tail wags dog?," Journal of Housing Economics, Elsevier, vol. 17(4), pages 272-290, December.
- Marjorie Flavin & Takashi Yamashita, 2002. "Owner-Occupied Housing and the Composition of the Household Portfolio," American Economic Review, American Economic Association, vol. 92(1), pages 345-362, March.
- Chris Downing & Richard Stanton & Nancy Wallace, 2005. "An Empirical Test of a Two-Factor Mortgage Valuation Model: How Much Do House Prices Matter?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 33(4), pages 681-710, December.
- Daniel Rösch & Harald Scheule, 2011.
"Securitization rating performance and agency incentives,"
BIS Papers chapters,
in: Bank for International Settlements (ed.), Portfolio and risk management for central banks and sovereign wealth funds, volume 58, pages 287-314
Bank for International Settlements.
- Daniel Roesch & Harald Scheule, 2011. "Securitization Rating Performance and Agency Incentives," Working Papers 182011, Hong Kong Institute for Monetary Research.
- John Krainer & Stephen Leroy, 2010. "Risky mortgages and mortgage default premiums," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue dec20.
- Jeske, Karsten & Krueger, Dirk & Mitman, Kurt, 2013. "Housing, mortgage bailout guarantees and the macro economy," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 917-935.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Diane Rosenberger).
If references are entirely missing, you can add them using this form.