|
|
Article: Borrower attributes and the risk of default of conventional mortgages.
- Article from:
- Atlantic Economic Journal
- Article date:
- June 1, 1999
- Author:
CopyrightCOPYRIGHT 1999 Atlantic Economic Society. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. (Hide copyright information)
|
Introduction
A special feature of conventional mortgage contracts is their embedded options. Each mortgage contract includes a prepayment call option, which gives the borrower the right to prepay, and a put option that enables him to sell back his property at the face value of the mortgage. Borrowers generally default when they cannot keep their monthly mortgage payments. One probable cause is a change in the borrower's transitory income following a job layoff or a sudden illness. Default of this type is characterized as involuntary because the borrower suddenly finds himself financially constrained.
In general, a homeowner would avoid exercising the ...