Suppose that you bought a house in Los Angeles, California in 2006Q1 and the house price was $600,000. Your LTV is 95%, so you borrow a fixed rate mortgage (FRM) of $570,000. The loan term is 30 years with interest rate 6% and monthly payments. Assuming the house price dropped 35% in Los Angeles during the period of 2006Q1 to 2009Q1.

1. [1 points] What is the value of your house at the end of 2009Q1?

2. [1 points] What is your loan balance at the end of 2009Q1 (36 months later)?

3. [2 points] Which is the better choice from economic point of view and why?

a. Keep the house and continue to pay mortgage every month

b. Default and walk away