Mortgage default and mortgage valuation
We 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.
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- Yongheng Deng & John M. Quigley & Robert Van Order, 2000.
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Econometric Society, vol. 68(2), pages 275-308, March.
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- 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.
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"Making sense of the subprime crisis,"
FRB Atlanta Working Paper No.
2009-02, Federal Reserve Bank of Atlanta.
- 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.
- 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.
- Mark Doms & Fred Furlong & John Krainer, 2007. "Subprime mortgage delinquency rates," Working Paper Series 2007-33, Federal Reserve Bank of San Francisco.
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