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What role did piggyback lending play in the housing bubble and mortgage collapse?

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  • LaCour-Little, Michael
  • Calhoun, Charles A.
  • Yu, Wei

Abstract

We examine the use of simultaneous close junior lien lending ("piggybacks") over the course of the recent housing bubble and subsequent mortgage market collapse. Using both state-level and Zip code-level data over the period 2001-2008, we find that the fraction of piggyback originations is related to higher foreclosure and default rates in subsequent years, and this relation is strongest for non-owner-occupied properties. The pattern, however, appears to be limited to the use of subprime piggybacks, rather than a more general phenomenon. Using a topology-based housing supply elasticity measure as an instrument for house price growth, we further confirm that the strong association of subprime piggyback origination with worse loan performance was not driven by the endogeneity of house price appreciation.

Suggested Citation

  • LaCour-Little, Michael & Calhoun, Charles A. & Yu, Wei, 2011. "What role did piggyback lending play in the housing bubble and mortgage collapse?," Journal of Housing Economics, Elsevier, vol. 20(2), pages 81-100, June.
  • Handle: RePEc:eee:jhouse:v:20:y:2011:i:2:p:81-100
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    References listed on IDEAS

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    1. Glenn B. Canner & Thomas A. Durkin & Charles A. Luckett, 1998. "Recent developments in home equity lending," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Apr, pages 241-251.
    2. Agarwal, Sumit & Ambrose, Brent W. & Chomsisengphet, Souphala & Liu, Chunlin, 2006. "An empirical analysis of home equity loan and line performance," Journal of Financial Intermediation, Elsevier, vol. 15(4), pages 444-469, October.
    3. Michael LaCour-Little, 2004. "Equity Dilution: An Alternative Perspective on Mortgage Default," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(3), pages 359-384, September.
    4. Agarwal, Sumit & Ambrose, Brent W. & Liu, Chunlin, 2006. "Credit Lines and Credit Utilization," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 1-22, February.
    5. Anthony Pennington-Cross & Giang Ho, 2010. "The Termination of Subprime Hybrid and Fixed-Rate Mortgages," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 38(3), pages 399-426.
    6. Robert B. Avery & Kenneth P. Brevoort & Glenn B. Canner, 2007. "Opportunities and Issues in Using HMDA Data," Journal of Real Estate Research, American Real Estate Society, vol. 29(4), pages 351-380.
    7. Mark Doms & Frederick T. Furlong & John Krainer, 2007. "Subprime mortgage delinquency rates," Working Paper Series 2007-33, Federal Reserve Bank of San Francisco.
    8. Atif Mian & Amir Sufi, 2009. "The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis," The Quarterly Journal of Economics, Oxford University Press, vol. 124(4), pages 1449-1496.
    9. Glenn B. Canner & Charles A. Luckett, 1994. "Home equity lending: evidence from recent surveys," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jul, pages 571-583.
    10. Benjamin J. Keys & Tanmoy Mukherjee & Amit Seru & Vikrant Vig, 2010. "Did Securitization Lead to Lax Screening? Evidence from Subprime Loans," The Quarterly Journal of Economics, Oxford University Press, vol. 125(1), pages 307-362.
    11. Karen M. Pence, 2006. "Foreclosing on Opportunity: State Laws and Mortgage Credit," The Review of Economics and Statistics, MIT Press, vol. 88(1), pages 177-182, February.
    12. Glenn B. Canner & James T. Fergus & Charles A. Luckett, 1988. "Home equity lines of credit," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jun, pages 361-373.
    13. Coleman IV, Major & LaCour-Little, Michael & Vandell, Kerry D., 2008. "Subprime lending and the housing bubble: Tail wags dog?," Journal of Housing Economics, Elsevier, vol. 17(4), pages 272-290, December.
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    Cited by:

    1. Fernando Ferreira & Joseph Gyourko, 2015. "A New Look at the U.S. Foreclosure Crisis: Panel Data Evidence of Prime and Subprime Borrowers from 1997 to 2012," NBER Working Papers 21261, National Bureau of Economic Research, Inc.
    2. Anundsen, André Kallåk & Heebøll, Christian, 2016. "Supply restrictions, subprime lending and regional US house prices," Journal of Housing Economics, Elsevier, vol. 31(C), pages 54-72.
    3. Michael LaCour-Little & Wei Yu & Libo Sun, 2014. "The Role of Home Equity Lending in the Recent Mortgage Crisis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 42(1), pages 153-189, March.
    4. repec:eee:jhouse:v:39:y:2018:i:c:p:17-24 is not listed on IDEAS
    5. Ahmed S. Abou-Zaid & Tesa Leonce, 2014. "Religious Pluralism, yet a Homogenous Stance on Interest Rate: The Case of Judaism, Christianity, and Islam," Contemporary Economics, University of Finance and Management in Warsaw, vol. 8(2), June.
    6. James P. Dow, 2016. "Mortgage originations during 2002-2007 as an example of an evolutionary market," Journal of Evolutionary Economics, Springer, vol. 26(5), pages 1007-1032, December.
    7. James Kau & Donald Keenan & Constantine Lyubimov, 2014. "First Mortgages, Second Mortgages, and Their Default," The Journal of Real Estate Finance and Economics, Springer, vol. 48(4), pages 561-588, May.
    8. Anundsen, André Kallåk & Heebøll, Christian, 2013. "Supply Restrictions, Subprime Lending and Regional US Housing Prices," Memorandum 04/2013, Oslo University, Department of Economics.
    9. Natacha Postel-Vinay, 2014. "Debt Dilution in 1920s America: Lighting the Fuse of a Mortgage Crisis," Working Papers 0053, European Historical Economics Society (EHES).

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