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A model of mortgage default

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  • Campbell, John Y.
  • Cocco, João F.

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. --

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Bibliographic Info

Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 452.

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Date of creation: 2014
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Handle: RePEc:zbw:cfswop:452

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Keywords: household finance; loan to value ratio; loan to income ratio; mortgage affordability; negative home equity; mortgage premia;

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Citations

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Cited by:
  1. repec:cbi:wpaper:08/rt/13 is not listed on IDEAS
  2. Hott, Christian, 2013. "A model of mortgage losses and its applications for macroprudential instruments," Discussion Papers 34/2013, Deutsche Bundesbank, Research Centre.
  3. Duchin, Ran & Sosyura, Denis, 2014. "Safer ratios, riskier portfolios: Banks׳ response to government aid," Journal of Financial Economics, Elsevier, Elsevier, vol. 113(1), pages 1-28.
  4. Benjamin J. Keys & Tomasz Piskorski & Amit Seru & Vikrant Vig, 2012. "Mortgage Financing in the Housing Boom and Bust," NBER Chapters, National Bureau of Economic Research, Inc, in: Housing and the Financial Crisis, pages 143-204 National Bureau of Economic Research, Inc.
  5. Agatha M. Poroshina, 2014. "Credit Risk Modeling Of Residential Mortgage Lending In Russia," HSE Working papers, National Research University Higher School of Economics WP BRP 30/FE/2014, National Research University Higher School of Economics.

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