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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 ...
Working Paper
The termination of subprime hybrid and fixed rate mortgages
Adjustable rate and hybrid loans have been a large and important component of subprime lending in the mortgage market. While maintaining the familiar 30-year term the typical adjustable rate loan in subprime is designed as a hybrid of fixed and adjustable characteristics. In its most prevalent form, the first two years are typically fixed and the remaining 28 years adjustable. Perhaps not surprisingly, using a competing risks proportional hazard framework that also accounts for unobserved heterogeneity, hybrid loans are sensitive to rising interest rates and tend to temporarily terminate at ...
Discussion Paper
Payment size, negative equity, and mortgage default
Surprisingly little is known about the importance of mortgage payment size for default, as efforts to measure the treatment effect of rate increases or loan modifications 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 ...
Working Paper
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 ...
Journal Article
Consumer guide to nontraditional mortgages published
Journal Article
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.
Journal Article
Housing specialists
Journal Article
Has the housing boom increased mortgage risk?
Journal Article
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 ...