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; Stanford University; National Bureau of Economic Research (NBER)
University of Wisconsin-Madison
NBER Working Paper No. w17315
We investigate the characteristics and the default behavior of households who take out complex mortgages. Unlike traditional fixed rate or adjustable rate mortgages, complex mortgages are not fully amortizing and enable households to postpone loan repayment. We find that complex mortgages are used by sophisticated households with high income levels and prime credit scores, in contrast to the low income population targeted by subprime mortgages. Complex mortgage borrowers have significantly higher delinquency rates than traditional mortgage borrowers even after controlling for leverage, payment resets, and other household and loan characteristics. The difference in the delinquency rates between complex and traditional borrowers increases with measures of financial sophistication and leverage, suggesting that complex borrowers are more strategic in their default decisions than traditional borrowers.
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Number of Pages in PDF File: 54working papers series
Date posted: August 29, 2011
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