Mortgage Default and Mortgage Valuation


John Krainer

Stephen F. LeRoy

Munpyung O

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2009-20 | September 1, 2009

We study optimal exercise by mortgage borrowers of the option to default. Also, we use an equilibrium valuation model incorporating default to show how mortgage yields and lender recovery rates on defaulted mortgages depend on initial loan-to-value ratios when borrowers default optimally. The analysis treats both the frictionless case and the case in which borrowers and/or lenders incur deadweight costs upon default. The model is calibrated using data on California mortgages. We find that the model’s principal testable implication for default and mortgage pricing–that default rates and yield spreads will be higher for high loan-to-value mortgages–is borne out empirically.

Article Citation

Krainer, John, Munpyung O, and Stephen F. LeRoy. 2009. “Mortgage Default and Mortgage Valuation,” Federal Reserve Bank of San Francisco Working Paper 2009-20. Available at