Abstract
Because homeownership represents the largest investment many individuals make, and the risks of competing mortgage products are not well understood, we develop a framework to quantify credit risks of mortgage products. We use simulations to examine the default rates of five types of mortgage products under both a normal and stressed economy to examine risk differences among the competing mortgage products. Results suggest that significant default risk differences exist between mortgage products. As a result, in addition to considering characteristics such as differential interest rates, points and fees, and the term of a mortgage, homebuyers should consider the risk differential of competing mortgage products before selecting a mortgage.