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Affordability, Financial Innovation, and the Start of the Housing Boom

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  • Jane K. Dokko
  • Benjamin J. Keys
  • Lindsay E. Relihan

Abstract

At their peak in 2005, roughly 60 percent of all purchase mortgage loans originated in the United States contained at least one non-traditional feature. These features, which allowed borrowers easier access to credit through teaser interest rates, interest-only or negative amortization periods, and extended payment terms, have been the subject of much regulatory and popular criticism. In this paper, we construct a novel county-level dataset to analyze the relationship between rising house prices and non-traditional features of mortgage contracts. We apply a break-point methodology and find that in housing markets with breaks in the mid-2000s, a strong rise in the use of non-traditional mortgages preceded the start of the housing boom. Furthermore, their rise was coupled with declining denial rates and a shift from FHA to subprime mortgages. Our findings support the view that a change in mortgage contract availability and a shift toward subprime borrowers helped to fuel the rise of house prices during the last decade.

Suggested Citation

  • Jane K. Dokko & Benjamin J. Keys & Lindsay E. Relihan, 2019. "Affordability, Financial Innovation, and the Start of the Housing Boom," Working Paper Series WP-2019-1, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhwp:wp-2019-01
    DOI: 10.21033/wp-2019-01
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    Cited by:

    1. James Conklin & W. Scott Frame & Kristopher S. Gerardi & Haoyang Liu, 2018. "Villains or Scapegoats? The Role of Subprime Borrowers in Driving the U.S. Housing Boom," FRB Atlanta Working Paper 2018-10, Federal Reserve Bank of Atlanta.
    2. 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.
    3. Arden Hall & Ramain Quinn Maingi, 2021. "The Behavioral Relationship Between Mortgage Prepayment and Default," Working Papers 21-12, Federal Reserve Bank of Philadelphia.
    4. Xiaoqing Zhou, 2022. "FinTech Lending, Social Networks and the Transmission of Monetary Policy," Working Papers 2203, Federal Reserve Bank of Dallas.
    5. Bäckman, Claes & Khorunzhina, Natalia, 2020. "Interest-Only Mortgages and Consumption Growth: Evidence from a Mortgage Market Reform," MPRA Paper 98524, University Library of Munich, Germany.

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    More about this item

    Keywords

    Housing-policy; mortgage loans; subprime mortgages;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R22 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Other Demand

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