This paper provides explicit and powerful tests of contingent claims approaches to modeling mortgage default. We investigate a model of "frictionless" default (i.e., one in which transactions costs, reputation costs, and moving costs play no role) and analyze its implications--the relationship between equity and default, the timing of default, its dependence upon initial conditions, and the sev...

In the narrow Wall Street interpretation, financial engineering refers to the creation of more specialized financial securities out of more fundamental assets such as collections of stocks, bonds, currencies, or mortgages. Used this way, the term now inevitably evokes memories of the mortgage pool “tranches” that became famous during the financial crisis of 2008–2009. In this instance, the paym...

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...

Mortgage option theoretic research generally focuses on the valuation of the default and prepayment options. Exercise of the delinquency option is often regarded as an interim step before terminal states of mortgage default or cure and of limited option value in its own right. However, in the current US housing crisis, borrowers may choose to defer a mortgage payment in order to mitigate a cash...