Suppose that you bought a house in Los Angeles, California in $2006$Q$1$ 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 $2006$Q$1$ to $2009$Q$1.$

What is the value of your house at the end of $2009Q1?$

What is your loan balance at the end of $2009Q1(36$ months later$)?$

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

Suppose that you borrowed a price level adjusted mortgage $($PLAM$)$ in $2006$Q$1$ instead of

borrowing a FRM and assuming that the first loan balance adjustment will occur at the end of

$2009$Q$1$ and everything else is equal.

What is your adjusted loan balance at the end of $2009$Q$1(36$ months later$)?$

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

Based on the findings by $2009$ Lin$-$Rosenblatt$-$Yao$-$JREFE, what is the implication for

PLAM to the $2007-2010$ housing crisis?

Discuss why PLAM would be popular to both lenders and borrowers in $2006.$