The pricing of FIREARMs (?Falling Interest Rate Adjustable-Rate Mortgages?)

1993 ◽  
Vol 6 (3) ◽  
pp. 251-275 ◽  
Author(s):  
Bjorn Flesaker ◽  
Ehud I. Ronn
Keyword(s):  
Interest Rate ◽  
Adjustable Rate

International Real Estate Review

1998 ◽  
Vol 1 (1) ◽  
pp. 64-80
Author(s):  
Jia He ◽  
◽  
Ming Liu ◽  
Keyword(s):  
Hong Kong ◽  
Interest Rate ◽  
Real Estate ◽  
Seasonal Pattern ◽  
Property Market ◽  
Mortgage Loans ◽  
Adjustable Rate ◽  
The Interest Rate

A study on the prepayment behavior of Hong Kong mortgage loans is conducted. With all of the loans as adjustable-rate mortgages (ARMs), we find that 1) Prepayment speeds up and then slows down as the mortgage seasons; 2) Prepayment speeds up as the rate markup decreases; 3) Prepayment speeds up as the interest rate increases; 4) Prepayment speeds up when the profitability ratio of the banks ( the prime-HIBOR spread) is higher; 5) Prepayment speeds up as the price of the property market falls; 6) Prepayment speed is faster for loans with a lower loan-to-value ratio; 7) Prepayment exhibits a seasonal pattern: people tend to prepay in the summer.

How Do Homeowners Choose Between Fixed and Adjustable Rate Mortgages?

2016 ◽  
Vol 06 (04) ◽  
pp. 1650013 ◽  
Author(s):  
Yevgeny Mugerman ◽  
Moran Ofir ◽  
Zvi Wiener
Keyword(s):  
Interest Rate ◽  
Housing Prices ◽  
Optimal Choice ◽  
Housing Finance ◽  
Short Term ◽  
Fixed Rate ◽  
High Interest Rate ◽  
Theoretical Literature ◽  
Rate Environment ◽  
Adjustable Rate

Housing is the most important asset in the portfolio of most households. Understanding the households’ decision on housing finance has important implications from a policy perspective, due to the effects it may have on the housing prices, on the housing market stability and on household welfare. The theoretical literature on housing finance focused on figuring out the optimal choice between fixed rate mortgages (FRMs) and adjustable rate mortgages (ARMs). We argue that the standard economic criteria are sometimes inadequate to explain household’s choices, which may be motivated by psychological factors. In other words, we claim that household’s choice depends only partially on the findings of the theoretical literature. We examine the effect of changes in the short-term market interest rate on the households’ choice between FRMs and ARMs. We test this effect using a unique data provided to us by the Bank of Israel, which contains detailed information on the household’s decision between FRM and ARM contracts in Israel in the past decade. The results of our analysis demonstrate a significant association between FRM preference and short-term interest rate reduction. Moreover, we find that the change in the short-term interest rate is more salient to the borrowers in periods of a high interest rate environment. We attribute these findings to Tversky and Kahneman (1974) availability and representativeness heuristics.

Risk-based price of mortgages

2019 ◽  
Vol 12 (3) ◽  
pp. 329-344
Author(s):  
Salvador Cruz Rambaud ◽  
María de los Ángeles Del Pino Álvarez
Keyword(s):  
Interest Rate ◽  
Yield Curve ◽  
Interest Rate Risk ◽  
Content Type ◽  
Loan Spread ◽  
Rate Risk ◽  
Banking Institutions ◽  
Adjustable Rate ◽  
Proper Estimation ◽  
The Interest Rate

Purpose The purpose of this paper is the analysis of the mortgage prices derived from the increase of defaults and the withdrawal of floor clauses in the mortgages offered by banking institutions in Spain. More specifically, this manuscript focuses on the evolution of the spread applied to mortgages contracted with a variable interest rate. Design/methodology/approach Two models have been considered to make a proper estimation of the yield curve to assess the loss due to the withdrawal of the floor clauses and quantify the component of the price used to cover the interest rate risk. Two different scenarios have been considered to avoid an underestimation of the aforementioned valuation. Findings The authors have shown that the increase in the percentage of doubtful mortgages has led to an increase in the spread of adjustable-rate mortgages. Moreover, the authors have shown that around 40 per cent of spreads are used to cover the interest rate risk. Originality/value The main contribution of this manuscript is the quantification of the loss expected by lenders and its impact in the spread. Due to this fact, the loan spread can be disaggregated into a component dependent on the credit risk associated with the borrower, and another component dependent on the interest rate risk to which the lender is exposed.

scholarly journals Payment Size, Negative Equity, and Mortgage Default

2017 ◽  
Vol 9 (4) ◽  
pp. 167-191 ◽  
Author(s):  
Andreas Fuster ◽  
Paul S. Willen
Keyword(s):  
Interest Rate ◽  
Treatment Effect ◽  
Mortgage Default ◽  
Rate Environment ◽  
Adjustable Rate

This paper studies the treatment effect of monthly payment size on mortgage default, using a sample of adjustable-rate loans that experienced large payment reductions thanks to the recent low interest rate environment. Payment size has an economically large effect on repayment behavior; for instance, cutting the required payment in half reduces the delinquency hazard by about 55 percent. Importantly, the link between payment size and delinquency is equally strong for borrowers that are significantly underwater on their mortgage. Relying on payment reductions for identification circumvents the selection concerns due to prepayments that would be associated with rate increases. (JEL D14, G21, R31)

Jefferson County, Alabama undertook a series of risky financial maneuvers in 2003 that included issuing large amounts of variable rate and auction rate securities as well as engaging in numerous interest rate swaps in order to lower the burgeoning costs of repairing its sewer system to comply with federal regulations. These complex financial instruments, intended to lower debt service costs on the countyʼs $3 billion in outstanding sewer warrants, led the county to financial bankruptcy in the wake of the financial markets collapse. This paper explores the choice of securities by analyzing the risk of adjustable rate securities and interest rate swaps, examining the Jefferson County case in detail, and providing some lessons for future financial management within the context of unexpected events such as the current recession

2013 ◽  
Vol 25 (2) ◽  
pp. 311-345 ◽  
Author(s):  
Dwight V. Denison ◽  
J. Bryan Gibson
Keyword(s):  
Interest Rate ◽  
Financial Markets ◽  
Financial Management ◽  
Variable Rate ◽  
Federal Regulations ◽  
Jefferson County ◽  
Sewer System ◽  
Unexpected Events ◽  
Interest Rate Swaps ◽  
Adjustable Rate

Jefferson County, Alabama undertook a series of risky financial maneuvers in 2003 that included issuing large amounts of variable rate and auction rate securities as well as engaging in numerous interest rate swaps in order to lower the burgeoning costs of repairing its sewer system to comply with federal regulations. These complex financial instruments, intended to lower debt service costs on the countyʼs $3 billion in outstanding sewer warrants, led the county to financial bankruptcy in the wake of the financial markets collapse. This paper explores the choice of securities by analyzing the risk of adjustable rate securities and interest rate swaps, examining the Jefferson County case in detail, and providing some lessons for future financial management within the context of unexpected events such as the current recession.

Valuing Individual Mortgage Servicing Contracts: A Comparison between Adjustable Rate Mortgages and Fixed Rate Mortgages

2005 ◽  
Vol 08 (01) ◽  
pp. 131-146 ◽  
Author(s):  
Che-Chun Lin ◽  
Lan-Chih Ho
Keyword(s):  
Interest Rate ◽  
Cash Flows ◽  
Economic Environment ◽  
Stochastic Interest Rate ◽  
Rate Process ◽  
Fixed Rate ◽  
Valuation Model ◽  
Stochastic Interest ◽  
Adjustable Rate

This study constructs a valuation model from which an option-adjusted spread approach is employed to value individual mortgage servicing contracts for both adjustable rate and fixed rate mortgages. The valuation model is comprised of an exogenous OTS prepayment model, a stochastic interest rate process, and other servicing fees and costs, all of which jointly determine the servicing contract's future net cash flows and the rate at which to discount these cash flows. The sensitivity of the price of mortgage servicing rights to the changes in the economic environment is also analyzed. This work is potentially useful for servicers not only servicing mortgages but also servicing other types of loans in order to examine servicing policy-related issues.

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