Abstract
This article integrates the concepts of insolvency, trigger events, and consumer risk posture into thetheory of single-family mortgage default. It presents a traditional consumer- or choice-theoretic frameworkthat recognizes common elements of mortgage optionality along with variables for insolvency,income, house price, and interest rates. Two motivations for mortgage default, insolvency and exerciseof a strategic option, are identified and compared under alternative settings.The model suggests that insolvency is a primary motivation for default. Broader measures of consumerfinancial health appear to provide better measures of the likelihood of default than do narrow measuresbased solely on home or mortgage value. Adverse shocks to income and house prices, but not interestrates, also affect default and insolvency through the erosion of personal wealth. Empirical evidencesupporting the hypotheses developed is provided along with an analysis of the aggregate time seriesof mortgage default.
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