The Rise in Mortgage Defaults

Journal of Economic Perspectives, Vol. 23, No. 1, pp. 27-50, 2009

24 Pages Posted: 27 Oct 2011

See all articles by Christopher J. Mayer

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 System

Shane M. Sherlund

Federal Reserve Board of Governors

Date Written: 2009

Abstract

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.

Suggested Citation

Mayer, Christopher J. and Pence, Karen M. and Sherlund, Shane M., The Rise in Mortgage Defaults (2009). Journal of Economic Perspectives, Vol. 23, No. 1, pp. 27-50, 2009. Available at SSRN: https://ssrn.com/abstract=1949309

Christopher J. Mayer (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Karen M. Pence

Board of Governors of the Federal Reserve System ( email )

Washington, DC 20551
United States
202-452-2342 (Phone)
202-728-5887 (Fax)

Shane M. Sherlund

Federal Reserve Board of Governors ( email )

20th and C Streets, NW
Mailstop 93
Washington, DC 20551
United States
202-452-3589 (Phone)
202-728-5887 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
192
Abstract Views
863
rank
156,682
PlumX Metrics