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Did the housing boom affect mortgage choices?
Rapid house price appreciation during the housing boom significantly influenced homebuyer selection of adjustable-rate mortgages over fixed-rate mortgages. In markets with high house price appreciation, house price gains directly influenced mortgage choice. But in markets with less appreciation, price gains did not influence borrower choices between adjustable or fixed-rate mortgages. In addition, the influence of fundamental drivers of mortgage choice, such as mortgage interest rate margins, tended to be muted in markets with high price appreciation.
AUTHORS: Takhtamanova, Yelena; Furlong, Frederick T.
Mortgage Choice in the Housing Boom: Impacts of House Price Appreciation and Borrower Type
The U.S. housing boom during the first part of the past decade was marked by rapid house price appreciation and greater access to mortgage credit for lower credit-rated borrowers. The subsequent collapse of the housing market and the high default rates on residential mortgages raise the issue of whether the pace of house price appreciation and the mix of borrowers may have affected the influence of fundamentals in housing and mortgage markets. This paper examines that issue in connection with one aspect of mortgage financing, the choice among fixed-rate and adjustable-rate mortgages. This analysis is motivated in part by the increased use of adjustable-rate mortgage financing, notably among lower credit-rated borrowers, during the peak of the housing boom. Based on analysis of a large sample of loan level data, we find strong evidence that house price appreciation dampened the influence of a number of fundamentals (mortgage pricing terms and other interest rate related metrics) that previous research finds to be important determinants of mortgage financing choices. With regard to the mix of borrowers, the evidence indicates that, while low risk-rated borrowers were affected on the margin more by house price appreciation, on balance those borrowers tended be at least as responsive to fundamentals as high risk-rated borrowers. The higher propensity of low credit-rated borrowers to choose adjustable-rate financing compared with high credit-rated borrowers in the housing boom appears to have been related to borrower credit risk metrics. Given the evidence related to loan pricing terms, other interest rate metrics and fixed effects, the relation of credit risk to mortgage financing choice seems more consistent with considerations such as credit constraints, risk preferences, and mortgage tenor than just a systematic lack of financial sophistication among higher credit risk borrowers.
AUTHORS: Takhtamanova, Yelena; Furlong, Frederick T.; Lang, David
Mortgage Choice: Interactive Effects of House Price Appreciation and Mortgage Pricing Components
Previous research provides rationales for and evidence of a link between house price appreciation and mortgage choice, with higher appreciation associated with higher take-up rates for adjustable-rate mortgages relative to fixed-rate mortgages. Research also finds mortgage interest rates and their underlying components to be important determinants of mortgage financing choices. In this paper we extend the earlier research and show that house price appreciation can have important interactive effects with those other determinants of mortgage financing choices. The analysis focuses on the period from 2000 to 2007, an episode marked by rapid house price appreciation along with a persistent and notable increase in the use of adjustable-rate mortgage financing, including alternative mortgage products. We find that higher house price appreciation dampened the estimated sensitivity of take-up rates among mortgage financing options to the underlying mortgage pricing components. The results, which are especially robust for fixed-rate and adjustable-rate mortgages that are fully amortized, were not driven solely by observations in markets with especially high rates of house price appreciation. Moreover, after taking into account the interactive effects with mortgage pricing components, house price appreciation is estimated to have had relatively little additional effect on take-up rates among mortgage financing options.
AUTHORS: Lang, David; Furlong, Frederick T.; Takhtamanova, Yelena
Understanding changes in exchange rate pass-through
Recent research suggests that there has been a decline in the extent to which firms ?pass through? changes in exchange rates to prices. Beyond providing further evidence in support of this claim, this paper proposes an explanation for the phenomenon. It then presents empirical evidence of a structural break during the 1990s in the relationship between the real exchange rate and CPI inflation for a set of fourteen OECD countries. It is suggested that the recent reduction in the real exchange rate pass-through can be attributed in part to the low-inflation environment of the 1990s.
AUTHORS: Takhtamanova, Yelena
Wealth effects out of financial and housing wealth: cross country and age group comparisons
To explore the link between household consumption and wealth, we use a new source of harmonized microdata (Luxembourg Wealth Study). We investigate whether there are differences in wealth effects from different types of wealth and across age groups. We consider three countries: Canada, Italy and Finland. We find that the overall wealth effect from housing is stronger than the effect from financial wealth for the three countries in the sample. Additionally, in accordance with the life-cycle theory of consumption, we find the housing wealth effect to be significantly lower for younger households. We also find between-country differences in the wealth effect.
AUTHORS: Takhtamanova, Yelena; Sierminska, Eva
Drivers of mortgage choices by risky borrowers
During the past decade?s housing boom, borrowers with lower credit ratings were more likely than higher-rated borrowers to choose adjustable-rate mortgages. This raises the question of whether, amid rapidly rising house prices, lower-rated borrowers paid less attention to loan pricing and interest-rate-related factors. However, even accounting for house price appreciation, research shows these borrowers were as, if not more, responsive as higher-rated borrowers to changes in interest-rate-related fundamentals. Their tendency to choose adjustable-rate mortgages is consistent with mortgage decisions based on economic considerations, rather than just lack of financial sophistication
AUTHORS: Lang, David; Furlong, Frederick T.; Takhtamanova, Yelena
Disentangling the wealth effect: some international evidence
In this Economic Letter, we report on research that takes advantage of newly available international data and examines in some detail the wealth effect in three countries, Canada, Finland, and Italy (Sierminska and Takhtamanova 2007). First, we investigate whether consumption responds differently to changes in housing and financial wealth. Second, we investigate whether there are differences in consumption responses to changes in wealth across different age groups.
AUTHORS: Sierminska, Eva; Takhtamanova, Yelena