Working Paper
Mortgage Default and Mortgage Valuation
Abstract: We develop an equilibrium valuation model that incorporates optimal default to show how mortgage yields and lender recovery rates on defaulted mortgages depend on initial loan-to-value (LTV) ratios. The analysis treats both the frictionless case and the case in which borrowers and lenders incur deadweight costs upon default. The model is calibrated using data on California mortgages. Given reasonable parameter values, the model does a surprisingly good job fitting the risk premium in the data for high LTV mortgages. Thus, from an ex ante perspective, we do not find strong evidence of systematic underpricing of default risk in the run-up to the housing market crisis.
https://doi.org/10.24148/wp2009-20
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https://fraser.stlouisfed.org/title/working-papers-federal-reserve-bank-san-francisco-7038/mortgage-default-mortgage-valuation-639306
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Bibliographic Information
Provider: Federal Reserve Bank of San Francisco
Part of Series: Working Paper Series
Publication Date: 2009-09-01
Number: 2009-20
Note: PDF date: November 2, 2009.