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Adjustable‐Rate Mortgages, Economic Fluctuations, and Lender Portfolio Change
Author(s) -
Lea Michael J.,
Zorn Peter M.
Publication year - 1986
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/1540-6229.00396
Subject(s) - rollover (web design) , floating interest rate , portfolio , interest rate , economics , monetary economics , payment , financial economics , finance , world wide web , computer science
In this study we examine the effects of economic fluctuations on the repayment behavior of a portfolio of adjustable‐rate mortgages (ARMs). Because the U.S. experience with ARMs is quite recent, we have used data on a form of ARM used in Canada, the rollover mortgage. The results of our analysis suggest that use of ARMs similar to the rollover mortgage may reduce but not eliminate interest‐rate risk for lenders, as borrowers, albeit constrained, prepay above‐market‐rate loans. In addition, we find that the periodic payment change inherent in the rollover mortgage does not lead to higher default rates and, therefore, credit risk.