On The Mortgage Default Model With Heterogeneous Agents

Based on the option model,this paper considers the borrowers’ heterogeneity and investigates the impact of different risk factors on borrower default behaviors.By quantitatively analyzing borrowers’ default behaviors and the aggregate default rate,this paper finds that:(1)rising house price growth rates reduce default risks,thereby reducing the aggregate default rate.(2)rising house price volatilities increase default risks,thereby increasing the aggregate default rate.(3)rising risk-free interest rates increase default risks of sub-prime borrowers and reduce default risks of high-quality borrowers,rendering a nonlinear effect on the aggregate default rate.This paper finds that risk-free interest rates amplify the impact of borrower heterogeneity on the aggregate default rates,reconciling two different conclusions in the existing literature about how interest rates affect aggregate default rates.We compare the default rates in the economy under different down payment ratios and find that increasing the down payment cannot eliminate systemic risks in the economy.We also compares the default rate in the economy under different default cost distributions and find that increasing the mean of default costs,that is,reducing the average household debt income ratio can reduce the default rate effectively.This paper uses the data from China Family Panel Studies for empirical analysis and finds that high housing prices are significantly correlated with high household leverage level.We suggest that it is necessary to re-examine the rationality of the loan restriction policy and find more effective ways to regulate high housing prices in order to reduce systemic risks in the economy.