Nontraditional Mortgage Products: Innovative or Toxic?

Abstract

This chapter reviews innovations in mortgage finance and examines borrower repayment problems by type of mortgage product. The first part of the chapter provides an overview of innovations in mortgage financing in the United States. The second part of this chapter examines the "toxicity" of new mortgage products. Specifically, descriptive evidence is provided on the causes of delinquency for borrowers with FRMs and adjustable-rate mortgages (ARMs). Despite the higher default rates among ARM borrowers, the evidence suggests that most repayment problems can be attributed to some unanticipated negative event that adversely affected household income or wealth as well as the lack of sufficient precautionary liquid assets. This finding is consistent for both borrowers with FRMs and ARMs. In addition, fewer delinquent ARM borrowers reported that they would live in their current residences beyond 2 years. This finding suggests that ARM borrowers expecting to terminate their loans in a relatively short period of time may have been caught by surprise by changing external economic conditions. Hence, efforts aimed at heightening borrower awareness to their vulnerability in home value and other economic fluctuations, no matter how long or short they expect to carry the debt obligation, are worthwhile. These policy implications are summarized in the conclusion. (PsycInfo Database Record (c) 2021 APA, all rights reserved)