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The Impact of Initial-Year Discounts on ARM Prepayments

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Author Info

  • Richard K. Green
  • James D. Shilling

Abstract

This study uses new data on the rate of prepayment on conventional single-family adjustable-rate mortgages (ARMs) that originated between 1983 and 1986 to determine if ARMs with and without initial-year discounts have the same probability of paying off. The new data are from a large national private mortgage insurer in the United States. Each loan is tracked from its origination date through prepayment or the end of 1991. Nonparametric test statistics are used to test for differences in these prepayment rates. The findings suggest that ARMs with initial-year discounts are paid off at a rate that is essentially no different from the rate on otherwise comparable ARMs without initial-year discounts. Copyright American Real Estate and Urban Economics Association.

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Bibliographic Info

Article provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.

Volume (Year): 25 (1997)
Issue (Month): 3 ()
Pages: 373-385

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Handle: RePEc:bla:reesec:v:25:y:1997:i:3:p:373-385

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Cited by:
  1. Sprecher, C. R. & Willman, Elliott, 2000. "The Role of the Initial Discount in the Pricing of Adjustable-Rate Mortgages," Journal of Housing Economics, Elsevier, vol. 9(1-2), pages 64-75, March.
  2. Anthony Pennington-Cross & Giang Ho, 2006. "The termination of subprime hybrid and fixed rate mortgages," Working Papers 2006-042, Federal Reserve Bank of St. Louis.
  3. Chow, Ying-Foon & Liu, Ming, 2003. "The value of the variable tenor mortgage feature in Hong Kong," Pacific-Basin Finance Journal, Elsevier, vol. 11(1), pages 61-80, January.
  4. Richard K. Green & Susan M. Wachter, 2007. "The housing finance revolution," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 21-67.
  5. Joseph Tracy & Joshua Wright, 2012. "Payment changes and default risk: theimpact of refinancing on expected credit losses," Staff Reports 562, Federal Reserve Bank of New York.
  6. Lanot, Gauthier & Leece, David, 2010. "The Performance of UK Securitized Subprime Mortgage Debt: ‘Idiosyncratic’ Behaviour or Mortgage Design?," MPRA Paper 27137, University Library of Munich, Germany.

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