Publication: A Model of Mortgage Default
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Date
2015
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Wiley-Blackwell
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Citation
CAMPBELL, JOHN Y., and JOÃO F. COCCO. 2015. “A Model of Mortgage Default.” The Journal of Finance 70 (4) (July 23): 1495–1554. doi:10.1111/jofi.12252.
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Abstract
In this paper, we solve a dynamic model of households' mortgage decisions incorporating labor income, house price, inflation, and interest rate risk. Using a zero-profit condition for mortgage lenders, we solve for equilibrium mortgage rates given borrower characteristics and optimal decisions. The model quantifies the effects of adjustable versus fixed mortgage rates, loan-to-value ratios, and mortgage affordability measures on mortgage premia and default. Mortgage selection by heterogeneous borrowers helps explain the higher default rates on adjustable-rate mortgages during the recent U.S. housing downturn, and the variation in mortgage premia with the level of interest rates.
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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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