Volume 28, Number 3, 2006 of the Journal of Real Estate Research

Screening Mortgage Default Risk: A Unified Theoretical Framework

Abstract:

We construct a unified framework for theoretically analyzing a set of mortgage
attributes, by which borrower types are screened according to their unobservable default
risk. Particularly, we show that in the presence of asymmetric information a self-selection
process is attained, where lower default risk type borrowers choose a mortgage loan with
constant over graduated payment, constant over price-level-adjusted payment, adjustable
over fixed rate, low over high loan-to-value ratio, and short over long maturity. The study
thus examines, among others, various mortgage attributes, which have never previously
been considered in the context of mortgage default under asymmetric information.
Accordingly, the theoretical predictions produce further grounds for empirical research
on mortgage default.