Mortgage Default with Asymmetric Information

  • Jan K. Brueckner
Article

DOI: 10.1023/A:1007885109086

Cite this article as:
Brueckner, J.K. The Journal of Real Estate Finance and Economics (2000) 20: 251. doi:10.1023/A:1007885109086

Abstract

This article analyzes mortgage-market equilibrium when borrower default costs are private information. By applying the approach of Rothschild and Stiglitz (1976), it is shown that asymmetric information regarding default costs distorts the contract choices available in the mortgage market, preventing safe borrowers (those with high default costs) from fully satisfying their demand for mortgage debt. Large loans are available for a substantial interest-rate premium, but only risky borrowers find this premium worth paying. The article builds on an empirical literature designed to test the ruthless-default principle from option-based models of mortgage pricing. That literature provides evidence against ruthless behavior, suggesting that default costs play an important role in borrower decisions. The article takes a further step by arguing that such costs are private information, which has important implications for market equilibrium.

default asymmetric information mortgage 

Copyright information

© Kluwer Academic Publishers 2000

Authors and Affiliations

  • Jan K. Brueckner
    • 1
  1. 1.Department of Economics and Institute of Government and Public AffairsUniversity of Illinois at Urbana-ChampaignChampaign

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