Embedded Options in the Mortgage Contract

25 Pages Posted: 2 Feb 1999

See all articles by Brent W. Ambrose

Brent W. Ambrose

Pennsylvania State University

Richard J. Buttimer

University of North Carolina (UNC) at Charlotte - Department of Finance & Business Law

Date Written: December 1998

Abstract

Loss mitigation is the process by which lenders attempt to minimize losses associated with foreclosure. As competition increases in the mortgage industry, lenders and servicers are under great pressure to adopt loss mitigation tactics rather than simply use foreclosure as the means of dealing with borrowers in default. However, to date, no study has examined the impact of loss mitigation programs on borrower behavior. This study presents a mortgage pricing model that fully specifies all borrower options with respect to default, including the ability to reinstate the mortgage out of default. This model documents the impact of various loss mitigation programs, including forbearance and anti-deficiency judgments, on borrower behavior. We also explicitly consider the impact of the value of credit on borrower default behavior.

JEL Classification: G12, G13, G21, R21

Suggested Citation

Ambrose, Brent W. and Buttimer, Richard J., Embedded Options in the Mortgage Contract (December 1998). Available at SSRN: https://ssrn.com/abstract=146509 or http://dx.doi.org/10.2139/ssrn.146509

Brent W. Ambrose (Contact Author)

Pennsylvania State University ( email )

University Park, PA 16802-3306
United States
814-867-0066 (Phone)
814-865-6284 (Fax)

Richard J. Buttimer

University of North Carolina (UNC) at Charlotte - Department of Finance & Business Law ( email )

9201 University City Blvd.
Charlotte, NC 28223
United States
704 687-6219 (Phone)

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