"This paper solves a dynamic model of a household's decision to default on its mortgage, taking into account labor … income, house price, inflation, and interest rate risk. Mortgage default is triggered by negative home equity, which results … from declining house prices in a low inflation environment with large mortgage balances outstanding. Not all households …

their option value by delaying resolution or modifying the loan. In the mortgage market, a conflict of interest (“holdup … holdup servicers are able to delay action on the first-lien mortgage. When they do act, servicers are more likely to choose …