House-Price Expectations, Alternative Mortgage Products, and Default

44 Pages Posted: 18 Aug 2015

See all articles by Jan K. Brueckner

Jan K. Brueckner

University of California, Irvine - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Paul S. Calem

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Leonard I. Nakamura

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Multiple version iconThere are 3 versions of this paper

Date Written: 2015-01-01

Abstract

August 2013, Revised December 2014 Rapid house-price depreciation and rising unemployment were the main drivers of the huge increase in mortgage default during the downturn years of 2007 to 2010. However, mortgage default was also associated with an increased reliance on alternative mortgage products such as pay-option and interest-only adjustable rate mortgages (ARMs), which allow the borrower to defer principal amortization. The goal of this paper is to better understand the forces that spurred use of alternative mortgages during the housing boom and the resulting impact on default patterns, relying on a unifying conceptual framework to guide the empirical work. The conceptual framework allows borrowers to choose the extent of mortgage “backloading,� the postponement of loan repayment through various mechanisms that constitutes a main feature of alternative mortgages. The model shows that, when future house-price expectations become more favorable, reducing default concerns, mortgage choices shift toward alternative products. This prediction is confirmed by empirical evidence showing that an increase in past house-price appreciation, which captures more favorable expectations for the future, raises the market share of alternative mortgages. In addition, using a proportional-hazard default model, the paper tests the fundamental presumption that backloaded mortgages are more likely to default, finding support for this view.

Keywords: Mortgage loans, Mortgages

Suggested Citation

Brueckner, Jan K. and Calem, Paul S. and Nakamura, Leonard I., House-Price Expectations, Alternative Mortgage Products, and Default (2015-01-01). FRB of Philadelphia Working Paper No. 15-1, Available at SSRN: https://ssrn.com/abstract=2646082 or http://dx.doi.org/10.2139/ssrn.2646082

Jan K. Brueckner (Contact Author)

University of California, Irvine - Department of Economics ( email )

3151 Social Science Plaza
Irvine, CA 92697-5100
United States

CESifo (Center for Economic Studies and Ifo Institute)

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Germany

Paul S. Calem

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Leonard I. Nakamura

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
215-574-3804 (Phone)
215-574-4364 (Fax)

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