Pricing Default Risk in Mortgage Backed Securities ∗

  title={Pricing Default Risk in Mortgage Backed Securities ∗},
  author={R. A. Singhania},
This paper values Mortgage Backed Securities (MBS) in an equilibrium framework that explicitly incorporates the default decisions of homeowners and essential contractual features of MBS. We first consider Collateralized Mortgage Obligations (CMOs), securities created by dividing a pool of mortgages into senior and residual tranches. We find that senior CMO bonds can be risk-free, low-risk or high-risk in equilibrium, depending on the relative size of the senior tranche. We extend the basic… CONTINUE READING
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