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A Note on Hybrid Mortgages

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  • Brent W. Ambrose
  • Michael LaCour-Little
  • Zsuzsa R. Huszar

Abstract

We extend previous research on traditional one-year adjustable-rate mortgages (ARMs) by analyzing the performance of 3/27 hybrid instruments. Under this contract innovation, which first appeared in the mid-1990s, note rates are fixed for three years after which they convert to a traditional one-year adjustment schedule with periodic and lifetime caps. We find high rates of prepayment, particularly at time of initial rate adjustment, and relatively high rates of default, as would be consistent with the payment shock that often affects adjustable-rate loans. Copyright 2005 by the American Real Estate and Urban Economics Association

Suggested Citation

  • Brent W. Ambrose & Michael LaCour-Little & Zsuzsa R. Huszar, 2005. "A Note on Hybrid Mortgages," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 33(4), pages 765-782, December.
  • Handle: RePEc:bla:reesec:v:33:y:2005:i:4:p:765-782
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    Cited by:

    1. Yuliya Demyanyk & Otto Van Hemert, 2008. "Understanding the subprime mortgage crisis," Proceedings 1092, Federal Reserve Bank of Chicago.
    2. deRitis, Cristian & Kuo, Chionglong & Liang, Yongping, 2010. "Payment shock and mortgage performance," Journal of Housing Economics, Elsevier, vol. 19(4), pages 295-314, December.
    3. 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.
    4. 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.
    5. 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.
    6. Chan, Sewin & Gedal, Michael & Been, Vicki & Haughwout, Andrew, 2013. "The role of neighborhood characteristics in mortgage default risk: Evidence from New York City," Journal of Housing Economics, Elsevier, vol. 22(2), pages 100-118.
    7. Man Cho, 2009. "Managing Mortgage Credit Risk: What Went Wrong With the Subprime and Alt-A Markets?," International Real Estate Review, Asian Real Estate Society, vol. 12(3), pages 295-324.
    8. Kathleen W. Johnson & Geng Li, 2014. "Are Adjustable-Rate Mortgage Borrowers Borrowing Constrained?," Real Estate Economics, American Real Estate and Urban Economics Association, pages 457-471.
    9. Dietsch, Michel & Petey, Joël, 2015. "The credit-risk implications of home ownership promotion: The effects of public subsidies and adjustable-rate loans," Journal of Housing Economics, Elsevier, vol. 28(C), pages 103-120.
    10. Yuliya Demyanyk & Otto Van Hemert, 2009. "Understanding the subprime mortgage crisis," Proceedings, Federal Reserve Bank of San Francisco.
    11. Tyler Yang & Che-Chun Lin & Man Cho, 2011. "Collateral Risk in Residential Mortgage Defaults," The Journal of Real Estate Finance and Economics, Springer, vol. 42(2), pages 115-142, February.
    12. 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.
    13. Jonathan Spader, 2010. "Beyond Disparate Impact: Risk-based Pricing and Disparity in Consumer Credit History Scores," The Review of Black Political Economy, Springer;National Economic Association, pages 61-78.
    14. 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.
    15. 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.
    16. Epouhe, Onesime & Hall, Arden, 2016. "Payment shock in HELOCs at the end of the draw period," Journal of Economics and Business, Elsevier, pages 131-147.
    17. Yuliya Demyanyk & Otto Van Hemert, 2011. "Understanding the Subprime Mortgage Crisis," Review of Financial Studies, Society for Financial Studies, pages 1848-1880.
    18. Chaffai, Mohamed & Dietsch, Michel, 2015. "Modelling and measuring business risk and the resiliency of retail banks," Journal of Financial Stability, Elsevier, vol. 16(C), pages 173-182.

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