Complex Mortgages*

Why don’t lenders renegotiate more home mortgages? Redefaults, self-cures, and securitization

Gene Amromin, Jennifer Huang, Clemens Sialm and Edward Zhong

Review of Finance, 2018, vol. 22, issue 6, 1975-2007

Abstract: Complex mortgages became a popular borrowing instrument during the bullish housing market of the early 2000s but vanished rapidly during the subsequent downturn. These non-traditional loans, including interest-only and negative-amortization mortgages, enable households to postpone loan repayment in contrast to fully amortizing traditional mortgages. Contrary to common perception, complex mortgages are used by households with high-income levels and prime credit scores, quite unlike the low-income population targeted by subprime mortgages. Nonetheless, we find that complex-mortgage borrowers become delinquent on their mortgages at rates twice as high as borrowers with plain-vanilla fixed-rate contracts even after controlling for household and loan characteristics. Our findings suggest a link between innovations in mortgage markets focused on prime borrowers and the financial crisis.

Keywords: Mortgages; Default; Bankruptcy; House prices (search for similar items in EconPapers)
JEL-codes: G21 G28 G40 H31 H81 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (2)

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Working Paper: Complex Mortgages (2011)
Working Paper: Complex mortgages (2010)
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