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Self‐Selection in the Fixed‐Rate Mortgage Market
Author(s) -
Yang T. L. Tyler
Publication year - 1992
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 - 10.1111/1540-6229.00588
Subject(s) - mortgage underwriting , fixed interest rate loan , economics , floating interest rate , selection (genetic algorithm) , loan , shared appreciation mortgage , mortgage insurance , interest rate , function (biology) , monetary economics , microeconomics , econometrics , actuarial science , finance , computer science , artificial intelligence , casualty insurance , evolutionary biology , biology , insurance policy
This paper analyzes the effect of information asymmetry between the lender and the borrower (i.e., the borrower knows how long he will reside in his home, whereas the lender does not) on the borrower's choice among the interest rate‐discount points combinations available in the fixed‐rate mortgage market. The analysis shows that if the rate‐points trade‐off of the mortgage menu is either too steep or too flat, then all types of borrowers will choose the same loan contract from the menu. In addition, if the rate‐points trade‐off is not convex to the origin, then only the contracts with extreme rate‐points combinations will be chosen by borrowers; all contracts with intermediate rate‐points combinations are redundant and will not be chosen by any borrowers. Intermediate rate‐points combination mortgage contracts would be chosen by some borrowers only if the mortgage menu were to provide a self‐selection function. Several necessary conditions of a self‐selection mortgage menu are depicted.