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Residential Mortgage Selection, Inflation Uncertainty and Real Payment Tilt

Author

Listed:
  • Don N. MacDonald

    (University of North Texas)

  • Kimberly Winson-Geideman

    (University of North Texas)

Abstract

This study addresses prime and subprime residential mortgage selection in an inflationary environment. Using data from the Mortgage Bankers Association on the proportion of variable rate mortgages closed for the 1994 through 2007 period, we find that higher anticipated inflation held with certainty increases the proportion of ARM originations, while greater inflation uncertainty in the sense of a Diamond-Stiglitz mean preserving spread decreases it. Further, the percentage of subprime ARM originations is significantly decreased with greater inflation uncertainty while the impact on prime ARM originations is statistically insignificant. These results are consistent with the hypothesis that prime borrowers hold a valuable exchange option that subprime borrowers do not, i.e. the opportunity to refinance into an alternative mortgage product, if necessary.

Suggested Citation

  • Don N. MacDonald & Kimberly Winson-Geideman, 2012. "Residential Mortgage Selection, Inflation Uncertainty and Real Payment Tilt," Journal of Real Estate Research, American Real Estate Society, vol. 34(1), pages 51-72.
    • Handle: RePEc:jre:issued:v:34:n:1:2012:p:51-72
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    Cited by:

    1. Binder, Carola, 2017. "Fed speak on main street: Central bank communication and household expectations," Journal of Macroeconomics, Elsevier, vol. 52(C), pages 238-251.
    2. Michael Richter, 2017. "Asymmetric Effects on Financial Cycles in a Monetary Union with Diverging Country Preferences for Variable- and Fixed-Rate Mortgages," Review of Economics & Finance, Better Advances Press, Canada, vol. 7, pages 19-36, February.
    3. Binder, Carola C., 2017. "Measuring uncertainty based on rounding: New method and application to inflation expectations," Journal of Monetary Economics, Elsevier, vol. 90(C), pages 1-12.
    4. Landini, Simone & Uberti, Mariacristina & Casellina, Simone, 2015. "Italian mortgage markets and their dynamics," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 108(C), pages 245-259.

    More about this item

    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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