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

Sumit Agarwal, Yongheng Deng, Chenxi Luo and Wenlan Qian

Review of Finance, 2016, vol. 20, issue 2, 467-500

Abstract: This article studies 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. Further analysis suggests that the greater default level and growth rate 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.

Date: 2016
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