The Hidden Peril: The Role of the Condo Loan Market in the Recent Financial Crisis

48 Pages Posted: 8 Nov 2012 Last revised: 7 May 2014

Sumit Agarwal

National University of Singapore

Yongheng Deng

University of Wisconsin - Madison - School of Business

Chenxi Luo

National University of Singapore (NUS) - Department of Real Estate

Wenlan Qian

National University of Singapore - NUS Business School

Date Written: March 2014

Abstract

This paper studies a largely overlooked and important segment of the mortgage market in explaining the recent financial crisis — the condominium loan market, which experienced a 15-fold increase in origination and constituted 15% of the overall residential loan originations from 2001 to 2007. Condominium loan defaults grow at a faster rate than single family (including subprime) loan defaults. Condo loans originated in 2006 are 12% more likely to default within two years than subprime loans of the same cohort in the single family market. Further analysis suggests that the faster default growth and a greater level of defaults in later loan cohorts are consistent with the investor channel explanation: investor borrowers default more, especially when house prices start to decline. We also show that condo defaults have triggered more defaults of the same cohort subprime mortgages at the same location.

Keywords: Financial Crisis, Condo Market, Default, Mortgages, Household Finance, Investors, Speculators, Subprime Mortgages

JEL Classification: G21, G28

Suggested Citation

Agarwal, Sumit and Deng, Yongheng and Luo, Chenxi and Qian, Wenlan, The Hidden Peril: The Role of the Condo Loan Market in the Recent Financial Crisis (March 2014). Available at SSRN: https://ssrn.com/abstract=2171751 or http://dx.doi.org/10.2139/ssrn.2171751

Sumit Agarwal

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Yongheng Deng

University of Wisconsin - Madison - School of Business ( email )

4110 Grainger Hall
975 University Avenue
Madison, WI 53706
United States
+1 (608) 262-4865 (Fax)

HOME PAGE: https://bus.wisc.edu/faculty/yongheng-deng

Chenxi Luo

National University of Singapore (NUS) - Department of Real Estate ( email )

4 Architecture Drive
Singapore 117566
Singapore

Wenlan Qian (Contact Author)

National University of Singapore - NUS Business School ( email )

15 Kent Ridge Drive
Singapore 117592, 119245
Singapore
(65) 65163015 (Phone)

HOME PAGE: http://sites.google.com/site/wenlanqian/

Register to save articles to
your library

Register

Paper statistics

Downloads
110
rank
231,654
Abstract Views
1,287
PlumX