Problem $2[20$ points$]$

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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$1.$

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What is the value of your house at the end of $2009$Q$1?$

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

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Which is the better choice from economic point of view and why?$$

Keep the house and continue to pay mortgage every month$$

Default and walk away$$

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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.$$

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

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Which is the better choice from economic point of view and why?$$

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Keep the house and continue to pay mortgage every month$$

Default and walk away$$

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Based on the findings by $2009$ Lin$-$Rosenblatt$-$Yao$-$JREFE, what is the implication for PLAM to the $2007-2010$ housing crisis?$$

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