The Hidden Peril: The Role of the Condo Loan Market in the Recent Financial Crisis

This paper studies a largely overlooked and important segment of the mortgage market in explaining the recent financial crisis—the condominium loan market, which experienced a 15fold increase in origination and constituted 15% of the overall residential loan originations from 2001 to 2007. Condominium loan defaults grow at a faster rate than single family (including subprime) loan defaults. Condo loans originated in 2006 are 12% more likely to default within two years than subprime loans of the same cohort in the single family market. Further analysis suggests that the faster default growth and a greater level of defaults in later loan cohorts are consistent with the investor channel explanation: investor borrowers default more, especially when house prices start to decline. We also show that condo defaults have triggered more defaults of the same cohort subprime mortgages at the same location.