The Rise in Mortgage Defaults
Christopher J. Mayer
Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)
Karen M. Pence
Board of Governors of the Federal Reserve - Household and Real Estate Finance Section
Shane M. Sherlund
Federal Reserve Board of Governors
Journal of Economic Perspectives, Vol. 23, No. 1, pp. 27-50, 2009
The first hints of trouble in the mortgage market surfaced in mid-2005, and conditions subsequently began to deteriorate rapidly. Mortgage defaults and delinquencies are particularly concentrated among borrowers whose mortgages are classified as "subprime" or "near-prime." The main factors underlying the rise in mortgage defaults appear to be declines in house prices and deteriorated underwriting standards, in particular an increase in loan-to-value ratios and in the share of mortgages with little or no documentation of income. Contrary to popular perception, the growth in unconventional mortgages products, such as those with prepayment penalties, interest-only periods, and teaser interest rates, does not appear to be a significant factor in defaults through mid-2008 because borrowers who had problems with these products could refinance into different mortgages. However, as markets realized the extent of the poor underwriting, underwriting standards tightened and borrowers began to face difficulties refinancing; this dynamic suggests that these unconventional products could pose problems going forward.
Number of Pages in PDF File: 24Accepted Paper Series
Date posted: October 27, 2011
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