Premium
Consumer Welfare Under the Adjustable‐Rate Mortgage: Some Empirical Evidence
Author(s) -
SaAadu J.
Publication year - 1987
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 - 10.1111/1540-6229.00424
Subject(s) - windfall gain , economics , consumer welfare , welfare , empirical evidence , preference , deadweight loss , differential (mechanical device) , monetary economics , microeconomics , macroeconomics , market economy , philosophy , epistemology , engineering , aerospace engineering
The theoretical literature on the economics of mortgage choice holds that consumer‐borrower preference for the ARM depends largely on the FRM‐ARM rate differential. However, there is no empirical evidence as to whether consumers are better off, worse off, or left indifferent with the choice of the ARM relative to the alternative FRM. This paper estimates the windfall gain or loss induced by the FRM‐ARM rate differential in a multiperiod setting. The major results are as follows: (1) on the average consumer‐borrowers reap windfall gain from the use of ARM, (2) but some individual consumers had windfall loss, (3) consumers with ARMs that have periodic interest‐rate caps have significantly higher windfall gain than consumers whose ARMs have no periodic rate caps, and (4) the level of the windfall gain (loss) appears to be correlated with the slope of the yield curve and the level of interest rate.