The Termination of Subprime Hybrid and Fixed-Rate Mortgages

Optimal Stopping and Losses on Subprime Mortgages

Lender losses on mortgage loans arise from a two-stage process. In the first stage, the borrower stops making payments if and when default is optimal. The second stage is a lengthy and costly period during which the lender employs legal remedies to obtain possession and execute a sale of the collateral. This research uses data on subprime mortgage losses to explore the role of borrower and coll...

Numerical Valuation of Fixed Rate Mortgages

This paper considers the value of a fixed rate mortgage where the borrower has the choice to make early payment. The contract value is formulated in terms of integral equations with the optimal early exercise boundary embedded. A fast and effective algorithm has been established for solving the problem numerically. A novelty quadrature method has been derived to handle the singular integrals. S...

Valuing Individual Mortgage Servicing Contracts: A Comparison between Adjustable Rate Mortgages and Fixed Rate Mortgages

This study constructs a valuation model from which an option-adjusted spread approach is employed to value individual mortgage servicing contracts for both adjustable rate and fixed rate mortgages. The valuation model is comprised of an exogenous OTS prepayment model, a stochastic interest rate process, and other servicing fees and costs, all of which jointly determine the servicing contract’s ...

Fixed and Variable-Rate Mortgages, Business Cycles and Monetary Policy

The aim of this paper is twofold. First, I study how the proportion of …xed and variable-rate mortgages in an economy can a¤ect the way shocks are propagated. Second, I analyze optimal implementable simple monetary policy rules and the welfare implications of this proportion. I develop and solve a New Keynesian dynamic stochastic general equilibrium model that features a housing market and a gr...

Subprime Outcomes: Risky Mortgages, Homeownership Experiences, and Foreclosures