The Solvency Paradox: How Risk-Based Mortgage Pricing Transforms Credit Rationing into Delayed Default

Does replacing hard debt-to-income (DTI) limits with risk-adjusted pricing improve household welfare? We develop a heterogeneous agent life-cycle model incorporating behavioral flow disutility, endogenous credit menus, and regime-switching income risk. Simulating a "Double Trigger" crisis, we uncover a Solvency Paradox: price-based regulation eliminates immediate credit rationing but imposes risk premia that erode liquidity buffers, generating a 53.7% cumulative default rate among marginal borrowers exceeding the counterfactual exclusion rate under quantity limits. Welfare consequences are starkly regressive: the "marginal middle class" suffers 6.7% consumption-equivalent losses while wealthy households gain 2.1%. Our policy comparison reveals a state-contingent hierarchy: forbearance efficiently resolves transitory liquidity shocks, while principal reduction is necessary for persistent solvency crises. State-contingent contracts (Shared Responsibility Mortgages) achieve intermediate efficacy with superior dynamic stability. Marginal credit expansions are dominated across all simulated shock scenarios. Optimal macro-prudential design requires severing the link between income shocks and debt service burdens.