Before revision:  For typical foreclosure costs, we find that contracts with automatic balance adjustments become preferable to the traditional fixed rate mortgage at contract rate spreads of approximately 50-100 basis points , depending on how far prices must fall before adjustments are made. Furthermore, these spreads rapidly decrease with the borrower utility from home ownership. Our results are obtained using American options pricing methods , in a  model with diffusive home prices , and either diffusive or constant interest rates.
After revision:  For typical foreclosure costs, we find that contracts with automatic balance adjustments become preferable to the traditional fixed rate mortgage at contract rate spreads of approximately 50-100 basis points . Results are obtained using American options pricing methods , in a model with diffusive home prices , and either diffusive or constant interest rates.