Exercise 6.2

Using a two-period model, this problem investigates tenure choice in

the presence of a down-payment requirement along with the incentives

for mortgage default. Consumer utility depends on non-housing con-

sumption in each period, which equals what is left after paying housing

costs. With

c

1

and

c

2

denoting consumption in periods 1 and 2, utility

is equal to

c

1

+

c

2

, where

is the discount factor.