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Why Do We Have ARMs?

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Author Info
Jan K. Brueckner
Abstract

This paper suggests a resolution to the paradox of inefficient risk bearing by adjustable-rate mortgage (ARM) borrowers. The analysis shows that when contracts are written in a realistic way, with payments linked across time via a common loan-rate function, risk sharing and the tilt of the mortgage payment stream become inextricably linked. Unless time preferences are identical or the cost of funds exhibits no time trend, borrowers will accept interest-rate risk in order to gain a more favorable time path of mortgage payments. Copyright American Real Estate and Urban Economics Association.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/1540-6229.00614
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Publisher Info
Article provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.

Volume (Year): 21 (1993)
Issue (Month): 3 ()
Pages: 333-345
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Handle: RePEc:bla:reesec:v:21:y:1993:i:3:p:333-345

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  1. Sumit Agarwal & Brent W. Ambrose, 2008. "Does it pay to read your junk mail? evidence of the effect of advertising on home equity credit choices," Working Paper Series WP-08-09, Federal Reserve Bank of Chicago. [Downloadable!]
  2. Masaki Mori & Julian Diaz III & Alan J. Ziobrowski, 2009. "Why Do Borrowers Choose Adjustable-Rate Mortgages over Fixed-Rate Mortgages? : A Behavioral Investigation," International Real Estate Review, Asian Real Estate Society, vol. 12(2), pages 98-120. [Downloadable!]
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This page was last updated on 2009-12-19.

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