A dramatic expansion of mortgage credit in recent years, coupled with a rapid run-up in house prices, has focused the attention of pundits and policymakers on the risks of home mortgage lending. In this article, Ronel Elul discusses the models that economists have developed to help us understand the default risk inherent in home mortgages and how default risk and house prices are related. He also applies these models to show how falling house prices would affect mortgage default rates today and explores the impact that rising default rates would have on financial institutions and other participants in the mortgage market.

This article appeared in the Third Quarter 2006 edition of Business Review.

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