Embedded Options in the Mortgage Contract

Valuation of Mortgage Servicing Rights with Foreclosure Delay and Forbearance Allowed

“…The base-case parameter values of the mortgage contract and economic environment shown in Table 1 are commonly used in mortgage pricing literature (e.g., Cox, Ingersoll and Ross, 1985;Kau et al, 1994;Hilliard et al, 1998;Ambrose and Buttimer, 2000). Therefore, we use these values so that our results can be directly compared to extant research.…”

“…Our model is based upon the Hilliard, Kau and Slawson (1998) mortgage pricing model with the extensions of Ambrose and Buttimer (2000) who introduced a more detailed specification of the default process on mortgage pricing decision. More important, our servicing valuation model is the extensions of Buttimer and Lin (2005) and we further treat default and delinquency as endogenous events.…”

“…To study rigorously this additional option, we evaluate the MSR with and without incorporating this particular delinquency option. That is, in addition to using the boundary conditions outlined in the traditional mortgage-pricing model, we also utilize the boundary conditions demonstrated in the work by Ambrose and Buttimer (2000). 3 To establish the framework of the valuation problem, we begin by using a case that skips the delinquency stage.…”

Delinquency and Default in Arms: The Effects of Protected Equity and Loss Aversion

“…Delinquency is defined as the nonpayment of a mortgage payment due (e.g. Ambrose and Buttimer 2000;Holmes 2003). Default occurs when a borrower has missed 90 days' installment and the fourth payment is due 3 (Ambrose and Capone 2000;Chen and Deng 2005).…”

The Value of Equitable Redemption in Commercial Mortgage Contracting

“…To do so, we focus on how alternate governance structures affect the borrower's investment decisions during the life of the loan. Our work is related to research by Riddiough and Wyatt (1994a, b), Harding and Sirmans (2002), Ambrose and Buttimer (2000) and Ambrose et al (1997) that considers the (strategic) renegotiation and default resolution of commercial and residential mortgages. However, our work differs from these papers in that while they only consider cases in which the value of the asset has fallen below the face value of the loan, we examine the case where stochastic events constrain the mortgagor's ability to make both the mortgage payment and an additional, valuable investment.…”