Affordability, Financial Innovation, and the Start of the Housing Boom

62 Pages Posted: 26 Feb 2019 Last revised: 29 Apr 2020

See all articles by Jane Dokko

Jane Dokko

Federal Reserve Bank of Chicago

Benjamin J. Keys

University of Pennsylvania

Lindsay Relihan


Date Written: January, 2019


At their peak in 2005, roughly 60 percent of all purchase mortgage loans originated in the United States contained at least one non-traditional feature. These features, which allowed borrowers easier access to credit through teaser interest rates, interest-only or negative amortization periods, and extended payment terms, have been the subject of much regulatory and popular criticism. In this paper, we construct a novel county-level dataset to analyze the relationship between rising house prices and non-traditional features of mortgage contracts. We apply a break-point methodology and find that in housing markets with breaks in the mid-2000s, a strong rise in the use of non-traditional mortgages preceded the start of the housing boom. Furthermore, their rise was coupled with declining denial rates and a shift from FHA to subprime mortgages. Our findings support the view that a change in mortgage contract availability and a shift toward subprime borrowers helped to fuel the rise of house prices during the last decade.

Keywords: Housing-policy, mortgage loans, subprime mortgage

JEL Classification: G22, R21, R22

Suggested Citation

Dokko, Jane and Keys, Benjamin J. and Relihan, Lindsay, Affordability, Financial Innovation, and the Start of the Housing Boom (January, 2019). FRB of Chicago Working Paper No. WP-2019-1, Available at SSRN: or

Jane Dokko (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

Benjamin J. Keys

University of Pennsylvania

Philadelphia, PA 19104
United States

Lindsay Relihan

Independent ( email )

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