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Adjustable‐Rate Mortgages, Economic Fluctuations, and Lender Portfolio Change

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  • Michael J. Lea
  • Peter M. Zorn

Abstract

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.

Suggested Citation

  • Michael J. Lea & Peter M. Zorn, 1986. "Adjustable‐Rate Mortgages, Economic Fluctuations, and Lender Portfolio Change," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 14(3), pages 432-447, September.
    • Handle: RePEc:bla:reesec:v:14:y:1986:i:3:p:432-447
    DOI: 10.1111/1540-6229.00396
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    References listed on IDEAS

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    1. John P. Herzog & James S. Earley, 1970. "Home Mortgage Delinquency and Foreclosure," NBER Books, National Bureau of Economic Research, Inc, number herz70-1, March.
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    Cited by:

    1. Seow Ong & Tien Sing & Alan Teo, 2007. "Delinquency and Default in Arms: The Effects of Protected Equity and Loss Aversion," The Journal of Real Estate Finance and Economics, Springer, vol. 35(3), pages 253-280, October.

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