Are adjustable-rate mortgage borrowers borrowing constrained?
AbstractPast research argues that changes in adjustable-rate mortgage (ARM) payments may lead households to cut back on consumption or to default on their mortgages. In this paper, we argue that these outcomes are more likely if ARM borrowers are borrowing constrained, and find that ARM borrowers exhibit characteristics and behavior that are consistent with being borrowing constrained. Although the demographic and financial characteristics of ARM and fixed-rate mortgage (FRM) borrowers are quite similar, ARM borrowers differ from FRM borrowers in their uses of credit and attitudes towards it. In addition, we find the consumption growth of households with an ARM is more sensitive to past income than the consumption growth of other households, suggesting the ARM borrowers are more likely subject to borrowing constraints that hinder their ability to smooth consumption.
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Bibliographic InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2011-21.
Date of creation: 2011
Date of revision:
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