We develop an equilibrium valuation model that incorporates optimal default to show how mortgage yields and lender recovery rates on defaulted mortgages depend on initial loan-to-value (LTV) ratios. The analysis treats both the frictionless case and the case in which borrowers and lenders incur deadweight costs upon default. The model is calibrated using data on California mortgages. Given reasonable parameter values, the model does a surprisingly good job fitting the risk premium in the data for high LTV mortgages. Thus, from an ex ante perspective, we do not find strong evidence of systematic underpricing of default risk in the run-up to the housing market crisis. ∗We are indebted to seminar participants at UCLA, UCSB, the China Economics and Management Academy, the Federal Reserve Banks of Chicago and San Francisco, the Federal Reserve Board, the University of Adelaide, the University of Melbourne and Victoria University (Wellington) for comments. The views expressed are those of the authors and not necessarily those of the Federal Reserve Bank of San Francisco or the Board of Governors of the Federal Reserve System.