Federal Reserve Bank of Chicago
Jennifer C. Huang
University of Texas at Austin - Department of Finance
University of Texas at Austin - McCombs School of Business; National Bureau of Economic Research (NBER)
University of Wisconsin-Madison
December 19, 2013
AFA 2012 Chicago Meetings Paper
Complex mortgages exhibit deferred amortization and enable households to postpone loan repayment in contrast to fully amortizing traditional mortgages. Unlike the low income population targeted by subprime mortgages, complex mortgages are used by households with high income levels and prime credit scores. We find that complex mortgage borrowers exhibit relatively high propensities to default on their mortgages and to declare personal bankruptcy even after controlling for household and loan characteristics. Our analysis suggests that complex mortgages attract sophisticated borrowers who take on more risks and are more strategic in their default decisions.
Number of Pages in PDF File: 47
Keywords: Mortgage Contract Choice, Strategic Default, Financial Crisis
JEL Classification: G21, D10, R21
Date posted: November 25, 2010 ; Last revised: December 20, 2013
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