Screening mortgage default risk: A unified theoretical framework

This study developed a unified framework for theoretically analyzing a set of mortgage attributes that screens borrower types according to their unobservable default risk. In the presence of asymmetric information, a self-selection process is attained, where lower default risk type borrowers choose a mortgage loan with constant over graduated payment, constant over price-level-adjusted payment, adjustable over fixed rate, low over high loan-to-value ratio, and short over long maturity. The study thus examines, among others, various mortgage attributes, which have never previously been considered in the context of mortgage default under asymmetric information. Accordingly, the theoretical predictions produce further grounds for empirical research on mortgage default.