PRICING MORTGAGE DEFAULT AND FORECLOSURE DELAY

This paper extends current mortgage-pricing models to recognize the im pact that delays between default and foreclosure have on the value of default to the borrower and the resulting value of the mortgage to inv estors. The model explicitly captures potential costs (through postfor eclosure deficiency judgments) and benefits (in the elimination of neg ative equity and ''free'' rent) that must be weighed at the time of de fault in determining whether the ultimate put option (via allowing for eclosure) is in the money. The results provide policy implications con cerning the operation of the FHA insurance program.