Pay Me Now or Pay Me Later: Alternative Mortgage Products and the Mortgage Crisis
California State University at Fullerton
California State University, Fullerton
August 20, 2010
Real Estate Economics, Forthcoming
Mortgage contract design has been identified as a contributory factor in the recent market crisis. Here we examine alternative mortgage products (including interest-only and other deferred amortization structures) and develop a game theoretic model of contract choice given uncertain future income and house prices across different types of borrowers. Results imply that deferred amortization contracts are more likely to be selected in housing markets with greater expected price appreciation and by households with greater risk tolerance; moreover, such products necessarily entail greater default risk, especially among lower-income households who are aggressive in housing consumption levels. Empirical tests of model predictions generally provide support for the theory.
Keywords: mortgage, housing, residential mortgage financeAccepted Paper Series
Date posted: August 23, 2010
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