Residential Mortgage Selection, Inflation Uncertainty and Real Payment Tilt
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.
Volume (Year): 34 (2012)
Issue (Month): 1 ()
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