47 Pages Posted: 25 Nov 2010 Last revised: 5 Aug 2017
Date Written: August 4, 2017
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. 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 findings suggest a link between innovations in mortgage markets focused on prime credit score borrowers and the financial crisis.
Keywords: Mortgage Contract Choice, Mortgage Default, Financial Crisis
JEL Classification: G21, D10, R21
Suggested Citation: Suggested Citation