This paper analyses the default option typical to American mortgages. Households borrow to buy durable housing, but future house prices are uncertain, and households find it dvantageous to default on their debt if house prices fall sufficiently. A key assumption of the model is that households...

The sensitivity of housing demand to mortgage rates and available leverage is key to understanding the effect of monetary and macroprudential policies on the housing market. However, since there is generally no exogenous variation in these variables that is independent of confounding factors...