Abstract
The option-based approach to mortgage default has established equity as the most important determinant of mortgage default. In addition, this approach suggests that the potential effect of nonequity factors, such as unemployment, interest rates, or borrower characteristics, on mortgage default depends on the level of equity. Previous empirical studies of mortgage default have ignored this implication of the option-based default model and assumed that the effect of nonequity factors on mortgage default was linear. Results presented here, however, indicate that the effect of nonequity factors declines with the seasoning of the mortgage. Also, unemployment and the origination interest rate are shown to be more important determinants of mortgage default than indicated by previous research.
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