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Early Evidence on Balloon Performance

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  • MacDonald, Gregor D
  • Holloway, Thomas M

Abstract

Balloon loans have become increasingly popular in recent years. For this reason, it is important to understand their features, assess their potential risks, and monitor their early performance. This article focuses on these topics. The first section discusses balloon characteristics and mortgage choice. The second section discusses expected balloon performance. The third section provides an econometric model for monitoring current performance. The fourth and fifth sections describe the data and results, respectively. The final section summarizes the article and offers some concluding remarks. The fundamental conclusions are that (I) early balloon performance is slightly worse than expected (i.e., balloons are not matching fixed-rate performance prior to balloon reset dates); (2) balloon performance is, however, within the range expected over the full term of the loans (i.e., performance worse than fixed-rate performance, but better than ARM performance); and (3) balloons have important characteristics that help mitigate systematic risk. Copyright 1996 by Kluwer Academic Publishers

Suggested Citation

  • MacDonald, Gregor D & Holloway, Thomas M, 1996. "Early Evidence on Balloon Performance," The Journal of Real Estate Finance and Economics, Springer, vol. 12(3), pages 279-293, May.
    • Handle: RePEc:kap:jrefec:v:12:y:1996:i:3:p:279-93
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    Cited by:

    1. Anthony Pennington‐Cross & Brent C Smith, 2020. "Early Termination of Small Loans in the Multifamily Mortgage Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 48(4), pages 1198-1233, December.
    2. Yao-Min Chiang & Jarjisu Sa-Aadu, 2014. "Optimal Mortgage Contract Choice Decision in the Presence of Pay Option Adjustable Rate Mortgage and the Balloon Mortgage," The Journal of Real Estate Finance and Economics, Springer, vol. 48(4), pages 709-753, May.
    3. Malmendier, Ulrike M. & Botsch, Matthew J., 2020. "The Long Shadows of the Great Inflation: Evidence from Residential Mortgages," CEPR Discussion Papers 14934, C.E.P.R. Discussion Papers.

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