Macroeconomics 1st Edition by Dean Karlan,Jonathan Morduch

Exercise 8

Many subprime borrowers entered into "adjustable- rate mortgages" with low teaser rates. These mortgages allowed borrowers to pay a low interest rate for the first two years on their mortgage, before the rate jumped to market levels. But the loan documents sometimes made it difficult for borrowers to understand that the rate would increase. Explain why this practice could lead to a bubble in housing prices.