Optimal Put Exercise: An Empirical Examination of Conditions for Mortgage Foreclosure

Posted: 15 Jun 2002

See all articles by Brent W. Ambrose

Brent W. Ambrose

Pennsylvania State University

Yongheng Deng

Wisconsin School of Business, University of Wisconsin-Madison

Charles A. Capone

JPMorgan Chase

Abstract

Implicit in option-pricing models of mortgage valuation are threshold levels of put-option value that must be crossed to induce borrower default. There has been little research into what these threshold values are that come out of pricing models, or how they compare to exercised option values seen in empirical data. This study decomposes boundary conditions for optimal default exercise to look at the economic dynamics that should lead to optimal default timing. Empirical data on FHA insured mortgage foreclosures is then examined to discern the predictive influence of optimal-option-valuation-and-exercise variables on observed default timing and values. Interesting results include a new understanding of how to measure and use property equity variables during economic downturns, house price index ranges over which default is exercised for various classes of borrowers, and implied differences in appreciation rates between market price indices and foreclosed properties.

Keywords: mortgage default, loss severity, foreclosure

Suggested Citation

Ambrose, Brent W. and Deng, Yongheng and Capone, Charles A., Optimal Put Exercise: An Empirical Examination of Conditions for Mortgage Foreclosure. Journal of Real Estate Finance & Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=302389

Brent W. Ambrose

Pennsylvania State University ( email )

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

Yongheng Deng

Wisconsin School of Business, University of Wisconsin-Madison ( email )

4110 Grainger Hall
975 University Avenue
Madison, WI 53706
United States
+1 (608) 262-4865 (Phone)

HOME PAGE: http://https://bus.wisc.edu/faculty/yongheng-deng

Charles A. Capone (Contact Author)

JPMorgan Chase ( email )

601 Pennsylvania Ave, NW
Suite 250N
Washington, DC 20004
United States
2025851373 (Phone)

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