Embedded options in the mortgage contract

Loss mitigation is the process by which lenders attempt to minimize losses associated with foreclosure. As competition increases in the mortgage indus try, lenders and servicers are under great pressure to adopt loss mitigatio n tactics rather than simply use foreclosure as the means of dealing with b orrowers in default. This study presents a mortgage-pricing model that full y specifies all borrower options with respect to default, including the abi lity to reinstate the mortgage out of default. We document the impact of va rious loss mitigation programs, including forbearance and antideficiency ju dgments, as well as the value of credit on borrower default behavior.