Payment changes and default risk: theimpact of refinancing on expected credit losses
This paper analyzes the relationship between changes in borrowers' monthly mortgage payments and future credit performance. This relationship is important for the design of an internal refinance program such as the Home Affordable Refinance Program (HARP). We use a competing risk model to estimate the sensitivity of default risk to downward adjustments of borrowers' monthly mortgage payments for a large sample of prime adjustable-rate mortgages. Applying a 26 percent average monthly payment reduction that we estimate would result from refinancing under HARP, we find that the cumulative ...
Has the housing boom increased mortgage risk?
Adjustable-rate mortgages and the Libor surprise
Adjustable-rate mortgages have typically been tied to either of two indexes, one based on U.S. treasuries, the other on the London interbank offered rate, or Libor. The index is used to determine a mortgage?s new interest rate when it is reset, and up until recently, the choice would have made little difference. But since 2007, the rates on which the indexes are based have diverged sharply, and borrowers with Libor-based adjustable-rate mortgages are likely to pay more than they would have had their mortgages been tied to treasuries. Moreover, the proportion of Libor-based ARMs has increased ...
Call to ARMS
Are adjustable-rate mortgage borrowers borrowing constrained?
Past research argues that changes in adjustable-rate mortgage (ARM) payments may lead households to cut back on consumption or to default on their mortgages. In this paper, we argue that these outcomes are more likely if ARM borrowers are borrowing constrained, and find that ARM borrowers exhibit characteristics and behavior that are consistent with being borrowing constrained. Although the demographic and financial characteristics of ARM and fixed-rate mortgage (FRM) borrowers are quite similar, ARM borrowers differ from FRM borrowers in their uses of credit and attitudes towards it. In ...
Fed publishes revised handbook on adjustable rate mortgages
Underscoring banking regulators' concerns about the growing use of nontraditional mortgages, the Consumer Handbook on Adjustable-Rate Mortgages has undergone one of its most substantial revisions since its 1987 publication.
Why is the market share of adjustable-rate mortgages so low?
Over the past several years, U.S. homebuyers have increasingly favored fixed-rate mortgages over adjustable-rate mortgages (ARMs). Indeed, ARMs have dropped to less than 10 percent of all residential mortgage originations, a near-record low. One might speculate that the decline in the ARM share has been driven by ?one-off? factors relating to the financial crisis. However, a statistical analysis suggests that recent trends can largely be explained by the same factors that have historically shaped mortgage choice?most notably, the term structure of interest rates and its effects on the ...