Working Paper #822
Affordability, Financial Innovation, and the Start of the Housing Boom
Jane K. Dokko · Benjamin J. Keys · Lindsay E. Relihan
Housing & Residential Mortgages
At their peak in 2005, roughly 60 percent of all purchase mortgage loans originated in
the United States contained at least one non-traditional feature. These features, which allowed
borrowers easier access to credit through teaser interest rates, interest-only or negative
amortization periods, and extended payment terms, have been the subject of much
regulatory and popular criticism. In this paper, we construct a novel county-level dataset to
analyze the relationship between rising house prices and non-traditional features of mortgage
contracts. We apply a break-point methodology and find that in housing markets with
breaks in the mid-2000s, a strong rise in the use of non-traditional mortgages preceded the
start of the housing boom. Furthermore, their rise was coupled with declining denial rates
and a shift from FHA to subprime mortgages. Our findings support the view that a change
in mortgage contract availability and a shift toward subprime borrowers helped to fuel the
rise of house prices during the last decade.