House-Price Expectations, Alternative Mortgage Products, and Default

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The goal of this paper is to better understand the forces that spurred use of alternative mortgages during the housing boom. A theoretical model shows that, when future house-price expectations become more favorable, reducing default concerns, mortgage choices shift toward alternative products, which are characterized by backloading of payments. The empirical work confirms this prediction by showing that an increase in past house-price appreciation, which captures more favorable expectations for the future, raises the market share of alternative mortgages. In addition, the paper tests the fundamental presumption that backloaded mortgages are more likely to default, finding support for this view.