Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/94372
Authors: 
Campbell, John Y.
Cocco, João F.
Year of Publication: 
2014
Series/Report no.: 
CFS Working Paper 452
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.
Subjects: 
household finance
loan to value ratio
loan to income ratio
mortgage affordability
negative home equity
mortgage premia
JEL: 
G21
E21
Document Type: 
Working Paper

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