Complex Mortgages

48 Pages Posted: 25 Nov 2010 Last revised: 16 Feb 2018

See all articles by Gene Amromin

Gene Amromin

Federal Reserve Bank of Chicago

Jennifer C. Huang

University of Texas at Austin - Department of Finance

Clemens Sialm

University of Texas at Austin - McCombs School of Business; National Bureau of Economic Research (NBER)

Edward Zhong

University of Wisconsin-Madison

Multiple version iconThere are 4 versions of this paper

Date Written: February 8, 2018

Abstract

Complex mortgages became a popular borrowing instrument during the bullish housing market of the early 2000s but vanished rapidly during the subsequent downturn. These non-traditional loans, including interest-only and negative-amortization loans, enable households to postpone loan repayment in contrast to fully-amortizing traditional mortgages. Contrary to common perception, complex mortgages are used by households with high income levels and prime credit scores, quite unlike the low-income population targeted by subprime mortgages. Nonetheless, we find that complex-mortgage borrowers become delinquent on their mortgages at rates twice as high as borrowers with plain-vanilla fixed-rate contracts even after controlling for household and loan characteristics. Our findings suggest a link between innovations in mortgage markets focused on prime borrowers and the financial crisis.

Keywords: Mortgage Contract Choice, Mortgage Default, Financial Crisis

JEL Classification: G21, D10, R21

Suggested Citation

Amromin, Gene and Huang, Jennifer Chunyan and Sialm, Clemens and Zhong, Edward, Complex Mortgages (February 8, 2018). AFA 2012 Chicago Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1714605 or http://dx.doi.org/10.2139/ssrn.1714605

Gene Amromin

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
230 S. LaSalle
Chicago, IL 60604
United States
3123225368 (Phone)
3123226011 (Fax)

Jennifer Chunyan Huang

University of Texas at Austin - Department of Finance ( email )

McCombs School of Business, B6600
Austin, TX 78712
United States
512-232-9375 (Phone)
512-471-5073 (Fax)

Clemens Sialm (Contact Author)

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

HOME PAGE: http://faculty.mccombs.utexas.edu/Clemens.Sialm/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Edward Zhong

University of Wisconsin-Madison ( email )

1180 Observatory Drive
Madison, WI 53706
United States

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