What Role Did Piggyback Lending Play in the Housing Bubble and Mortgage Collapse?

55 Pages Posted: 7 Oct 2010  

Michael LaCour-Little

California State University at Fullerton

Charles A. Calhoun

Calhoun Consulting

Wei Yu

California State Polytechnic University, Pomona

Date Written: October 5, 2010

Abstract

We examine the use of simultaneous close junior lien lending (“piggybacks”) over the course of the recent housing bubble and subsequent mortgage market collapse. Using both state-level and zip code-level data over the period 2001-2008, we find that the fraction of piggyback originations is related to higher foreclosure and default rates in subsequent years, and this relation is strongest for non-owner occupied properties. The pattern, however, appears to be limited to the use of subprime piggybacks, rather than a more general phenomenon. Using a topology-based housing supply elasticity measure as an instrument for house price growth, we further confirm that the strong association of subprime piggyback origination with worse loan performance was not driven by the endogeneity of house price appreciation.

Keywords: mortgage, foreclosure, housing, piggyback lending

JEL Classification: G01, G21, R31

Suggested Citation

LaCour-Little, Michael and Calhoun, Charles A. and Yu, Wei, What Role Did Piggyback Lending Play in the Housing Bubble and Mortgage Collapse? (October 5, 2010). Available at SSRN: https://ssrn.com/abstract=1688033 or http://dx.doi.org/10.2139/ssrn.1688033

Michael LaCour-Little (Contact Author)

California State University at Fullerton ( email )

5133 Mihaylo Hall
Fullerton, CA 92834-6848
United States
657-278-4014 (Phone)
657-278-2161 (Fax)

Charles A. Calhoun

Calhoun Consulting ( email )

4837 King Solomon Drive
Annandale, VA 22003
United States
703-978-3495 (Phone)
703-978-1933 (Fax)

Wei Yu

California State Polytechnic University, Pomona ( email )

3801 W. Temple Avenue Pomona
Pomona, CA 91768
United States

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