This paper presents a reduced-form barrier model for the optimal principal reset in a loan modification, thereby maximizing the loan value to the lender bank and minimizing the likelihood of foreclosure by the homeowner. Reducing the loan-to-value (LTV) ratio will reduce the present value of...

In this paper we examine the effects of limited liability on mortgage dynamics. While the literature has focused on default rates, renegotiation, or loan rates individually, we study them together as equilibrium outcomes of the strategic interaction between lenders and borrowers. We present a...

This paper investigates a model of default in financial networks where the decision by one agent on whether or not to default impacts the incentives of other agents to escape default. Agents' payoffs are determined by the clearing mechanism introduced in the seminal contribution of Eisenberg and...