“Complex Mortgages” by Jennifer Huang
University of Texas at Austin
University of Texas at Austin and NBER
University of Wisconsin-Madison
Federal Reserve Bank of Chicago
We investigate the characteristics and the default behavior of households who take out complex mortgages. Unlike traditional fixed rate or adjustable rate mortgages, complex mortgages are not fully amortizing and enable households to postpone loan repayment. We find that complex mortgages are used by households with high income levels and prime credit scores, in contrast to the low income population targeted by subprime mortgages. Complex mortgage borrowers have significantly higher delinquency rates than traditional mortgage borrowers even after controlling for leverage, payment resets, and other household and loan characteristics. Our analysis of dynamic default patterns, bankruptcy filings, and household characteristics suggests that complex mortgage contracts attract sophisticated borrowers who are more strategic in their default decisions.