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Why were interest only mortgages so population during U.S. housing boom?

Author

Listed:
  • Gadi Barlevy

    (Federal Reserve Bank of Chicago)

  • Jonas Fisher

    (Federal Reserve Bank of Chicago)

Abstract

Borrowers in U.S. cities where house prices boomed in the 2000s relied heavily on backloaded interest-only (IO) mortgages that require borrowers to only pay interest for the first few years of the loan. We develop a theory that encompasses common explanations for IO use, and show that while they can account for much of the regional variation in IOs, they cannot explain why IOs were popular in boom cities. We propose a new explanation. In our model, uncertain price appreciation coupled with non-recourse lending can lead to speculation financed with backloaded mortgages. We find evidence that IO borrowers behaved in ways consistent with such speculation, and discuss the policy implications of our findings. (Copyright: Elsevier)

Suggested Citation

  • Gadi Barlevy & Jonas Fisher, 2021. "Why were interest only mortgages so population during U.S. housing boom?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 41, pages 205-224, July.
    • Handle: RePEc:red:issued:20-5
    DOI: 10.1016/j.red.2020.09.001
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    Cited by:

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    2. Bäckman, Claes & Lutz, Chandler, 2025. "Mortgage innovation and house price booms," Journal of Urban Economics, Elsevier, vol. 145(C).
    3. Jing Xian Ng, 2024. "Recurring-Payment Sensitivity in Household Borrowing," Working Papers 25-22, Federal Reserve Bank of Philadelphia.
    4. Gillitzer, Christian & Prasad, Nalini, 2025. "The effects of macroprudential policy restricting housing investor credit supply," Journal of Urban Economics, Elsevier, vol. 149(C).

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    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • R0 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General

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