An Option Based Model of Rational Residential Mortgage Default

Abstract

For recent years, the subject of residential mortgage default has claimed the attention of scholars, policy analysts, government officials and common consumers. This article analyzed the relation between the possibility of rational residential mortgage default and the market value of the house, and on the basement of option theory, suggested a model to estimate the possibility of rational default. Using this model, holders of residential mortgage portfolios could predict the possibility of rational default.