This paper extends current mortgage-pricing models to recognize the impact that delays between default and foreclosure have on the value of default to the borrower and the resulting value of the mortgage to investors. The model explicitly captures potential costs (through postforeclosure deficiency judgments) and benefits (in the elimination of negative equity and "free" rent) that must be weighed at the time of default in determining whether the ultimate put option (via allowing foreclosure) is in the money. The results provide policy implications concerning the operation of the FHA insurance program.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics