The Leverage Cycle in the Mortgage Market

Abstract

The recent boom and bust in house prices coincided with a boom and bust in mortgage leverage. At the peak of the boom, regions with the greatest rise in house prices also had the greatest rise in leverage. During the bust, regions with the greatest drop in house prices also had the greatest drop in leverage. During the peak of the housing boom, most highly leveraged borrowers had second mortgages for the portion of the loan with LTV >80%. When house prices began to drop, most second mortgages disappeared.