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The rise in mortgage defaults

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Author Info
Christopher J. Mayer
Karen M. Pence
Shane M. Sherlund
Abstract

The main factors underlying the rise in mortgage defaults appear to be declines in house prices and deteriorated underwriting standards, in particular an increase in loan-to-value ratios and in the share of mortgages with little or no documentation of income. Contrary to popular perception, the growth in unconventional mortgages products, such as those with prepayment penalties, interest-only periods, and teaser interest rates, does not appear to be a significant factor in defaults through mid-2008 because borrowers who had problems with these products could refinance into different mortgages. However, as markets realized the extent of the poor underwriting, underwriting standards tightened and borrowers began to face difficulties refinancing; this dynamic suggests that these unconventional products could pose problems going forward.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2008-59.

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Date of creation: 2008
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Handle: RePEc:fip:fedgfe:2008-59

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Related research
Keywords: Mortgage loans ; Subprime mortgage ; Default (Finance);

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Atif Mian & Amir Sufi, 2008. "The Consequences of Mortgage Credit Expansion: Evidence from the 2007 Mortgage Default Crisis," NBER Working Papers 13936, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Markus K. Brunnermeier & Jonathan A. Parker, 2005. "Optimal Expectations," American Economic Review, American Economic Association, vol. 95(4), pages 1092-1118, September. [Downloadable!]
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  3. Larry Cordell & Karen Dynan & Andreas Lehnert & Nellie Liang & Eileen Mauskopf, 2008. "The incentives of mortgage servicers: myths and realities," Finance and Economics Discussion Series 2008-46, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  4. Christopher L. Foote & Kristopher Gerardi & Paul S. Willen, 2008. "Negative equity and foreclosure: theory and evidence," Public Policy Discussion Paper 08-3, Federal Reserve Bank of Boston. [Downloadable!]
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  5. Xavier Gabaix & David Laibson, 2006. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," The Quarterly Journal of Economics, MIT Press, vol. 121(2), pages 505-540, May. [Downloadable!] (restricted)
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  6. John Y. Campbell, 2006. "Household Finance," NBER Working Papers 12149, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Robert B. Avery & Kenneth P. Brevoort & Glenn B. Canner, 2007. "The 2006 HMDA data," Web Site, Board of Governors of the Federal Reserve System (U.S.), issue Sep. [Downloadable!]
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    • Robert B. Avery & Kenneth P. Brevoort & Glenn B. Canner, 2008. "The 2007 HMDA data," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Dec, pages A107-A146. [Downloadable!]
  8. Kristopher Gerardi & Adam Hale Shapiro & Paul S. Willen, 2007. "Subprime outcomes: risky mortgages, homeownership experiences, and foreclosures," Working Papers 07-15, Federal Reserve Bank of Boston. [Downloadable!]
  9. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 443-77, May.
  10. Andrew Haughwout & Richard Peach & Joseph Tracy, 2008. "Juvenile delinquent mortgages: bad credit or bad economy?," Staff Reports 341, Federal Reserve Bank of New York. [Downloadable!]
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  11. Christopher J. Mayer & Karen Pence, 2008. "Subprime Mortgages: What, Where, and to Whom?," NBER Working Papers 14083, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Bucks, Brian & Pence, Karen, 2008. "Do borrowers know their mortgage terms?," Journal of Urban Economics, Elsevier, vol. 64(2), pages 218-233, September. [Downloadable!] (restricted)
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Cited by:
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  1. Shane M. Sherlund, 2008. "The past, present, and future of subprime mortgages," Finance and Economics Discussion Series 2008-63, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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