"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 …

This paper solves a dynamic model of households' mortgage decisions incorporating labor income, house price, inflation …, and interest rate risk. It uses a zero-profit condition for mortgage lenders to solve for equilibrium mortgage rates given … borrower characteristics and optimal decisions. The model quantifies the effects of adjustable vs. fixed mortgage rates, loan …