Working Paper: NBER ID: w17315
Authors: Gene Amromin; Jennifer Huang; Clemens Sialm; Edward Zhong
Abstract: We investigate the characteristics and the default behavior of households who take out complex mortgages. Unlike traditional fixed rate or adjustable rate mortgages, complex mortgages are not fully amortizing and enable households to postpone loan repayment. We find that complex mortgages are used by sophisticated households with high income levels and prime credit scores, in contrast to the low income population targeted by subprime mortgages. Complex mortgage borrowers have significantly higher delinquency rates than traditional mortgage borrowers even after controlling for leverage, payment resets, and other household and loan characteristics. The difference in the delinquency rates between complex and traditional borrowers increases with measures of financial sophistication and leverage, suggesting that complex borrowers are more strategic in their default decisions than traditional borrowers.
Keywords: Complex Mortgages; Default Behavior; Household Characteristics
JEL Codes: E60; G01; G10; H31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Mortgage Complexity (G21) | Higher Delinquency Rates (G33) |
| Higher Financial Sophistication (G53) | Higher Delinquency Rates (G33) |
| Complex Mortgages (G21) | Strategic Defaulting (G33) |
| Complex Mortgages (G21) | Smaller Increase in Bankruptcy Declarations (K35) |
| Delinquency Rates (G33) | Bankruptcy Declarations (K35) |