Homeownership Symposium - Mortgage Default Option Mispricing and Borrower Cost Procyclicality

HBTL-13: This paper addresses the expansion and performance of non-traditional mortgage lending products to better understand the impact of such products on borrowers and the financial system. We show that ex ante measured credit risk of these instruments increased while loan rates decreased. We also examine why the lower lending costs and expanded lending box did not increase homeownership rates in the years 2004 to 2007. We conclude with policy implications.