• Print
  • Email

Working Paper, No. 2010-12, January 2010
Mortgage Choices During the U.S. Housing Boom (REVISED October 2018)

Borrowers in cities where house prices boomed in the 2000s relied heavily on backloaded interest-only (IO) mortgages that require borrowers only to pay interest initially. We develop a theory that encompasses common explanations for IO use and show that while they can largely account for the regional variation in IOs, they cannot fully explain the concentration of IOs in booming cities. We propose a new explanation. In our model, uncertain price appreciation and no-recourse lending can lead to speculation financed with backloaded mortgages. We find evidence that IO borrowers behaved in ways consistent with such speculation.

Federal Reserve Bank of Chicago, 230 South LaSalle Street, Chicago, Illinois 60604-1413, USA. Tel. (312) 322-5322

Copyright © 2020. All rights reserved.

Please review our Privacy Policy | Legal Notices