Abstract
We develop a framework to quantify credit risks of non-traditional mortgage products. Ex ante probabilities of default are caused by willingness-to-pay and ability-to-pay problems and the high default rates for NMPs confirm that payment shock is a critical default risk indicator. Monte Carlo simulations using three correlated stochastic variables, under normal and stressed economies, confirm that the default risk of 3/27, 2/28, and option ARM contracts have a greater probability of default than other mortgage products in all economic scenarios.