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Prepayment Risk in Adjustable Rate Mortgages Subject to Initial Year Discounts: Some New Evidence

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  • Brent W. Ambrose
  • Michael LaCour-Little

Abstract

This paper uses microlevel data to examine recent prepayment performance of adjustable rate mortgages (ARMs) employing the competing risk methodology developed by Deng, Quigley and Van Order (2000). We find support for the teaser rate and adjustment date effects implied by the theoretical model of Kau "et al." (1993). In addition, we find that teased ARMs bear prepayment risk related to their discount, contrary to results reported by VanderHoff (1996) and Green and Shilling (1997). Finally, and contrary to the usual finding for fixed-rate mortgages, we find that loan age has a negative effect on prepayment risk for ARMs, consistent with the phenomenon that borrowers with high mobility and/or propensity to refinance exit the pool early. Copyright 2001 by the American Real Estate and Urban Economics Association.

Suggested Citation

  • Brent W. Ambrose & Michael LaCour-Little, 2001. "Prepayment Risk in Adjustable Rate Mortgages Subject to Initial Year Discounts: Some New Evidence," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 29(2), pages 305-327.
  • Handle: RePEc:bla:reesec:v:29:y:2001:i:2:p:305-327
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    Citations

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    Cited by:

    1. Tyler T. Yang & Jessie Y. Zhang, 2014. "Mortgage defaults and risk-based capital: post-global financial crisis development and implications for emerging markets," Chapters,in: The Global Financial Crisis and Housing, chapter 10, pages 231-261 Edward Elgar Publishing.
    2. Agarwal, Sumit & Ambrose, Brent W. & Chomsisengphet, Souphala & Liu, Chunlin, 2006. "An empirical analysis of home equity loan and line performance," Journal of Financial Intermediation, Elsevier, vol. 15(4), pages 444-469, October.
    3. deRitis, Cristian & Kuo, Chionglong & Liang, Yongping, 2010. "Payment shock and mortgage performance," Journal of Housing Economics, Elsevier, vol. 19(4), pages 295-314, December.
    4. Johnson, Kathleen W. & Sarama, Robert F., 2015. "End of the Line: Behavior of HELOC Borrowers Facing Payment Changes," Finance and Economics Discussion Series 2015-73, Board of Governors of the Federal Reserve System (U.S.).
    5. Anthony Pennington-Cross & Giang Ho, 2010. "The Termination of Subprime Hybrid and Fixed-Rate Mortgages," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 38(3), pages 399-426.
    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.
    7. Brent W. Ambrose & James N. Conklin, 2014. "Mortgage Brokers, Origination Fees, Price Transparency and Competition," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 42(2), pages 363-421, June.
    8. Kathleen W. Johnson & Geng Li, 2014. "Are Adjustable-Rate Mortgage Borrowers Borrowing Constrained?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 42(2), pages 457-471, June.
    9. Andreas Fuster & Paul S. Willen, 2017. "Payment Size, Negative Equity, and Mortgage Default," American Economic Journal: Economic Policy, American Economic Association, vol. 9(4), pages 167-191, November.
    10. Lin, Che-Chun & Prather, Larry J. & Chu, Ting-Heng & Tsay, Jing-Tang, 2013. "Differential default risk among traditional and non-traditional mortgage products and capital adequacy standards," International Review of Financial Analysis, Elsevier, vol. 27(C), pages 115-122.
    11. 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.
    12. repec:kap:jrefec:v:56:y:2018:i:2:d:10.1007_s11146-017-9597-0 is not listed on IDEAS
    13. Elaine Fortowsky & Michael LaCour-Little & Eric Rosenblatt & Vincent Yao, 2011. "Housing Tenure and Mortgage Choice," The Journal of Real Estate Finance and Economics, Springer, vol. 42(2), pages 162-180, February.
    14. Tracy, Joseph & Wright, Joshua, 2016. "Payment changes and default risk: The impact of refinancing on expected credit losses," Journal of Urban Economics, Elsevier, vol. 93(C), pages 60-70.
    15. Amy Cutts & Robert Order, 2004. "On the Economics of Subprime Lending," The Journal of Real Estate Finance and Economics, Springer, vol. 30(2), pages 167-196, November.
    16. Calem, Paul S. & LaCour-Little, Michael, 2004. "Risk-based capital requirements for mortgage loans," Journal of Banking & Finance, Elsevier, vol. 28(3), pages 647-672, March.
    17. Mark Yuying An, 2004. "Likelihood-Based Estimation of a Proportional-Hazard, Competing- Risk Model with Grouped Duration Data," Urban/Regional 0407013, EconWPA.
    18. Michael LaCour-Little & Michael Marschoun & Clark L. Maxam, 2002. "Improving Parametric Mortgage Prepayment Models with Non-parametric Kernel Regression," Journal of Real Estate Research, American Real Estate Society, vol. 24(3), pages 299-328.

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