Much of the literature on the economics of mortgage markets has studied the FRM-ARM choice made by individual borrowers. However, to decide if the outcome of such a choice is efficient or approximately so, it is necessary to explore the question of optimal risk-sharing in mortgage contracts. But...

This paper explores an overlooked phenomenon in mortgage markets: repayment of underwater mortgages. Since repayment in this case requires the borrower to use out-of-pocket funds along with the proceeds from the house sale to settle the loan, it may appear unattractive and even irrational. But...