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The Termination of Subprime Hybrid and Fixed‐Rate Mortgages
Author(s) -
PenningtonCross Anthony,
Ho Giang
Publication year - 2010
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/j.1540-6229.2010.00271.x
Subject(s) - fixed interest rate loan , loan , equity (law) , floating interest rate , subprime mortgage crisis , payment , economics , monetary economics , mortgage underwriting , interest rate , shared appreciation mortgage , financial system , business , mortgage insurance , finance , financial crisis , macroeconomics , casualty insurance , political science , law , insurance policy
Adjustable‐rate and hybrid loans have been a larger component of subprime mortgage lending in the mortgage market than prime lending. The typical adjustable‐rate loan in subprime is a hybrid of fixed and adjustable characteristics in which the first 2 years are fixed and the remaining 28 years adjustable. Hybrid loans terminate at elevated probabilities even before the first adjustment date. Hybrid loan terminations are sensitive to interest rates and teaser rates (payment shocks). Default probabilities increase dramatically when payment shocks are mixed with low or no equity in the home. This is the mixture of events that helped to trigger the 2007/2008 subprime mortgage crisis.