Prepayment Risk in Adjustable Rate Mortgages Subject to Initial Year Discounts: Some New Evidence

Ambrose, Brent W.; LaCour‐Little, Michael

doi:10.1111/1080-8620.00012

Cited by 59 publications

(47 citation statements)

References 30 publications

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“…In other words, the increase in the default hazard after the reset that is typically observed in the data (for example, Ambrose and LaCour-Little 2001;Ambrose, LaCourLittle, and Huszar 2005;or Pennington-Cross and Ho 2010) confounds the treatment effect of higher payments with the selection of higher-quality borrowers into prepayment.…”

Section: Selection Versus Treatment Effectsmentioning

confidence: 96%

Payment Size, Negative Equity, and Mortgage Default

Fuster

Willen

2017

American Economic Journal: Economic Policy

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractSurprisingly little is known about the importance of mortgage payment size for default, as efforts to measure the treatment effect of rate increases or loan modifi cations are confounded by borrower selection. We study a sample of hybrid adjustable-rate mortgages that have experienced large rate reductions over the past years and are largely immune to these selection concerns. We show that interest rate changes dramatically affect repayment behavior. Our estimates imply that cutting a borrower's payment in half reduces his hazard of becoming delinquent by about two-thirds, an effect that is approximately equivalent to lowering the borrower's combined loan-to-value ratio from 145 to 95 (holding the payment fi xed). These fi ndings shed light on the driving forces behind default behavior and have important implications for public policy.

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Section: Selection Versus Treatment Effectsmentioning

confidence: 96%

Payment Size, Negative Equity, and Mortgage Default

Fuster

Willen

2017

American Economic Journal: Economic Policy

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“…Additionally, it may depend on personal and demographic characteristics (Sa-Aadu, and Sirmans, 1995;Ling and McGill, 1998), risk preferences (Brueckner, 1994;1995;Campbell and Cocco, 2003), the opportunity cost of owner occupation (Leece, 2004), interest rate expectations (Leece, 2000a;, liquidity constraints and affordability issues (Leece, 2000b;LaCour-Little, 2009;Bramley and Watkins, 2009). From the supply side, mortgage contract choice is influenced by the institutional features and efficiency of the mortgage finance system (Lanot and Leece, 2014;Leece, 2004;Stephens, 2007;Scanlon and Whitehead, 2011), mortgage pricing and mortgage funding mechanisms (Stephens and Quilgairs, 2008;Ambrose and LaCour-Little, 2001;Loutskina, 2011;Badarinza, et.al., 2013, Campbell, 2013, profitability factors (Vickery, 2006;Petersen, et.al., 2012;Fuster and Vickery, 2013), and macroeconomic issues (Miles, 2004;Whitehead2011).…”

Section: Introductionmentioning

confidence: 99%

Supply driven mortgage choice

Koblyakova

White

2016

Urban Studies

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.Variable mortgage contracts dominate the UK mortgage market (Miles, 2004). The dominance of the variable rate mortgage contracts has important consequences for the transmission mechanism of monetary policy decisions and systemic risks (Khandani et al., 2012;Fuster and Vickery, 2013). This raises an obvious concern that a mortgage market such as that in the UK, where the major proportion of mortgage debt is either at a variable or fixed for less than two years rate (Badarinza, et al., 2013; CML, 2012), is vulnerable to alterations in the interest rate regime. Theoretically, mortgage choice is determined by demand and supply factors. So far, most of the existing literature has focused on the demand side perspective, and what is limited is consideration of supply side factors in empirical investigation on mortgage choice decisions. This paper uniquely explores whether supply side factors may partially explain observed/ex-post mortgage type decisions. Empirical results detect that lenders' profit motives and mortgage funding/pricing issues may have assisted in preferences toward variable rate contracts. Securitisation is found to positively impact upon gross mortgage lending volumes while negatively impacting upon the share of variable lending flows. This shows that an increase in securitisation not only improves liquidity in the supply of mortgage funds, but also has the potential to shift mortgage choices toward fixed mortgage debt. The policy implications may involve a number of measures, including reconsideration of the capital requirements for the fixed, as opposed to the variable rate mortgage debt, growing securitisation and optimisation of the mortgage pricing policies.

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“…The combination of an initial teaser rate and a possible prepayment penalty will reduce the prepayment rate during the period leading up to the first rate reset. As a consequence, there tends to be a spike in prepayments at the rate reset [Ambrose and LaCour-Little (2001), Ambrose et al (2005), Pennington-Cross and Ho (2010)]. The challenge in identifying if the increase in the mortgage payment at the first reset leads to higher defaults is that there may also be a change in the composition of the remaining borrowers in terms of their unobserved characteristics.…”

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confidence: 99%