PRIVATIZED DEFAULT RISK AND REAL-ESTATE RECESSIONS - THE UK MORTGAGE MARKET

A mortgage pricing model is developed when a borrower goes through a s eries of distress states, including delinquency, long-term nonpayment and ultimate default. These steps are sequential, and depend on prices and alternatives faced by the borrower, The multistate default model is applied to the mortgage market in the United Kingdom. As a byproduc t, a pricing structure for the U.K, endowment mortgage, which combines a good and a life insurance policy, is developed. Income and liquidit y constraints are shown to affect the decision to keep a mortgage curr ent in different states of distress. Solvent borrowers may thus keep t heir mortgages current, even when equity is negative.