Pay Me Now or Pay Me Later: Alternative Mortgage Products and the Mortgage Crisis

46 Pages Posted: 3 Jan 2011  

Michael LaCour-Little

California State University at Fullerton

Jing Yang

California State University, Fullerton - Department of Finance

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Abstract

Mortgage contract design has been identified as a contributory factor in the recent market crisis. Here we examine alternative mortgage products (including interest-only and other deferred amortization structures) and develop a game theoretic model of contract choice given uncertain future income and house prices across different types of borrowers. Results imply that deferred amortization contracts are more likely to be selected in housing markets with greater expected price appreciation and by households with greater risk tolerance; moreover, such products necessarily entail greater default risk, especially among lower-income households who are aggressive in housing consumption levels. Empirical tests of model predictions generally provide support for the theory.

Suggested Citation

LaCour-Little, Michael and Yang, Jing, Pay Me Now or Pay Me Later: Alternative Mortgage Products and the Mortgage Crisis. Real Estate Economics, Vol. 38, No. 4, pp. 687-732, 2010. Available at SSRN: https://ssrn.com/abstract=1733773 or http://dx.doi.org/10.1111/j.1540-6229.2010.00280.x

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)

Jing Yang

California State University, Fullerton - Department of Finance ( email )

PO Box 34080
Fullerton, CA 92834-9480
United States

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