Abstract
A homeowner currently residing in a home worth less than the mortgage frequently decides to walk away. This contributes to reduced market values of nonperforming loans and an illiquid real estate market with uncertain housing prices. The absence of loan restructuring plans beneficial to both homeowners and lienholders has perpetuated the problem. This study proposes a constrained optimization model that provides distressed property valuation and optimal loan restructuring terms. We are able to obtain these results by acknowledging homeowners have a real option and incorporating the value of that option in the maximization problem.