IDEAS home Printed from https://ideas.repec.org/p/fip/fedfwp/2014-05.html
   My bibliography  Save this paper

Mortgage Choice in the Housing Boom: Impacts of House Price Appreciation and Borrower Type

Author

Listed:
  • Frederick T. Furlong
  • David Lang
  • Yelena Takhtamanova

Abstract

The U.S. housing boom during the first part of the past decade was marked by rapid house price appreciation and greater access to mortgage credit for lower credit-rated borrowers. The subsequent collapse of the housing market and the high default rates on residential mortgages raise the issue of whether the pace of house price appreciation and the mix of borrowers may have affected the influence of fundamentals in housing and mortgage markets. This paper examines that issue in connection with one aspect of mortgage financing, the choice among fixed-rate and adjustable-rate mortgages. This analysis is motivated in part by the increased use of adjustable-rate mortgage financing, notably among lower credit-rated borrowers, during the peak of the housing boom. Based on analysis of a large sample of loan level data, we find strong evidence that house price appreciation dampened the influence of a number of fundamentals (mortgage pricing terms and other interest rate related metrics) that previous research finds to be important determinants of mortgage financing choices. With regard to the mix of borrowers, the evidence indicates that, while low risk-rated borrowers were affected on the margin more by house price appreciation, on balance those borrowers tended be at least as responsive to fundamentals as high risk-rated borrowers. The higher propensity of low credit-rated borrowers to choose adjustable-rate financing compared with high credit-rated borrowers in the housing boom appears to have been related to borrower credit risk metrics. Given the evidence related to loan pricing terms, other interest rate metrics and fixed effects, the relation of credit risk to mortgage financing choice seems more consistent with considerations such as credit constraints, risk preferences, and mortgage tenor than just a systematic lack of financial sophistication among higher credit risk borrowers.

Suggested Citation

  • Frederick T. Furlong & David Lang & Yelena Takhtamanova, 2014. "Mortgage Choice in the Housing Boom: Impacts of House Price Appreciation and Borrower Type," Working Paper Series 2014-5, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfwp:2014-05
    DOI: 10.24148/wp2014-05
    as

    Download full text from publisher

    File URL: http://www.frbsf.org/economic-research/files/wp2014-05.pdf
    File Function: Full text
    Download Restriction: no
    File URL: https://libkey.io/10.24148/wp2014-05?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Dhillon, Upinder S & Shilling, James D & Sirmans, C F, 1987. "Choosing between Fixed and Adjustable Rate Mortgages: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(2), pages 260-267, May.
    2. Margaret Hwang Smith & Gary Smith, 2006. "Bubble, Bubble, Where's the Housing Bubble?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 37(1), pages 1-68.
    3. Bucks, Brian & Pence, Karen, 2008. "Do borrowers know their mortgage terms?," Journal of Urban Economics, Elsevier, vol. 64(2), pages 218-233, September.
    4. Brahima Coulibaly & Geng Li, 2009. "Choice of Mortgage Contracts: Evidence from the Survey of Consumer Finances," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 37(4), pages 659-673, December.
    5. Kristopher Gerardi & Andreas Lehnert & Shane M. Sherlund & Paul Willen, 2008. "Making Sense of the Subprime Crisis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(2 (Fall)), pages 69-159.
    6. Statman, Meir, 1982. "Fixed Rate or Index-Linked Mortgages from the Borrower's Point of View: A Note," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 17(3), pages 451-457, September.
    7. Christopher L. Foote & Kristopher S. Gerardi & Paul S. Willen, 2012. "Why Did So Many People Make So Many Ex Post Bad Decisions? The Causes of the Foreclosure Crisis," NBER Working Papers 18082, National Bureau of Economic Research, Inc.
    8. John Krainer & Elizabeth Laderman, 2014. "Mortgage Loan Securitization and Relative Loan Performance," Journal of Financial Services Research, Springer;Western Finance Association, vol. 45(1), pages 39-66, February.
    9. James Vickery, 2007. "Interest rates and consumer choice in the residential mortgage market: a summary," Proceedings 1041, Federal Reserve Bank of Chicago.
    10. William C. Wheaton & Gleb Nechayev, 2008. "The 1998 ?2005 Housing "Bubble" and the Current "Correction": What’s Different This Time?," Journal of Real Estate Research, American Real Estate Society, vol. 30(1), pages 1-26.
    11. Nothaft, Frank E & Wang, George H K, 1992. "Determinants of the ARM Share of National and Regional Lending," The Journal of Real Estate Finance and Economics, Springer, vol. 5(2), pages 219-234, June.
    12. Brueckner, Jan K & Follain, James R, 1988. "The Rise and Fall of the ARM: An Econometric Analysis of Mortgage Choice," The Review of Economics and Statistics, MIT Press, vol. 70(1), pages 93-102, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Frederick T. Furlong & David Lang & Yelena Takhtamanova, 2019. "Mortgage Choice: Interactive Effects of House Price Appreciation and Mortgage Pricing Components," Working Paper Series 2016-28, Federal Reserve Bank of San Francisco.
    2. Dancsik, Bálint, 2017. "Számít-e a devizahiteles múlt?. A lakáshitelkamatok rögzítéséről szóló döntés vizsgálata mikroszintű adatokon [Analysing the decision of fixing housing loan interest rates on micro-level data: does," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(10), pages 1030-1055.
    3. Ehrmann, Michael & Ziegelmeyer, Michael, 2014. "Household Risk Management and Actual Mortgage Choice in the Euro Area," MEA discussion paper series 201406, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    4. Guiso, Luigi & Sodini, Paolo, 2013. "Household Finance: An Emerging Field," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1397-1532, Elsevier.
    5. Brahima Coulibaly & Geng Li, 2009. "Choice of Mortgage Contracts: Evidence from the Survey of Consumer Finances," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 37(4), pages 659-673, December.
    6. repec:mea:meawpa:14283 is not listed on IDEAS
    7. Cristian Badarinza & John Y. Campbell & Tarun Ramadorai, 2018. "What Calls to ARMs? International Evidence on Interest Rates and the Choice of Adjustable-Rate Mortgages," Management Science, INFORMS, vol. 64(5), pages 2275-2288, May.
    8. Dungey, Mardi & Doko Tchatoka, Firmin & Yanotti, María B., 2018. "Endogeneity in household mortgage choice," Economic Modelling, Elsevier, vol. 73(C), pages 30-44.
    9. Dungey, Mardi & Doko Tchatoka, Firmin & Yanotti, María B., 2018. "Using multiple correspondence analysis for finance: A tool for assessing financial inclusion," International Review of Financial Analysis, Elsevier, vol. 59(C), pages 212-222.
    10. Bubb, Ryan & Kaufman, Alex, 2014. "Securitization and moral hazard: Evidence from credit score cutoff rules," Journal of Monetary Economics, Elsevier, vol. 63(C), pages 1-18.
    11. Philomena M. Bacon & Peter G. Moffatt, 2012. "Mortgage Choice as a Natural Field Experiment on Choice under Risk," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(7), pages 1401-1426, October.
    12. Andersen, Steffen & Campbell, John Y. & Meisner-Nielsen, Kasper & Ramadorai, Tarun, 2014. "Inattention and Inertia in Household Finance: Evidence from the Danish Mortgage Market," Scholarly Articles 17492179, Harvard University Department of Economics.
    13. John Y. Campbell & João F. Cocco, 2003. "Household Risk Management and Optimal Mortgage Choice," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(4), pages 1449-1494.
    14. Ing-Haw Cheng & Sahil Raina & Wei Xiong, 2014. "Wall Street and the Housing Bubble," American Economic Review, American Economic Association, vol. 104(9), pages 2797-2829, September.
    15. 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.
    16. Elsa Fornero & Chiara Monticone & Serena Trucchi, 2011. "The effect of financial literacy on mortgage choices," CeRP Working Papers 121, Center for Research on Pensions and Welfare Policies, Turin (Italy).
    17. Steffen Andersen & John Y. Campbell & Kasper Meisner Nielsen & Tarun Ramadorai, 2020. "Sources of Inaction in Household Finance: Evidence from the Danish Mortgage Market," American Economic Review, American Economic Association, vol. 110(10), pages 3184-3230, October.
    18. Jan K. Brueckner & Kangoh Lee, 2014. "Optimal Risk-Sharing in Mortgage Contracts: The Effects of Potential Prepayment and Default," CESifo Working Paper Series 4979, CESifo.
    19. Michael Ehrmann & Michael Ziegelmeyer, 2017. "Mortgage Choice in the Euro Area: Macroeconomic Determinants and the Effect of Monetary Policy on Debt Burdens," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(2-3), pages 469-494, March.
    20. Yevgeny Mugerman & Moran Ofir & Zvi Wiener, 2016. "How Do Homeowners Choose Between Fixed and Adjustable Rate Mortgages?," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 6(04), pages 1-21, December.
    21. Ben-Shahar, Danny & Golan, Roni, 2014. "Real estate and personality," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 53(C), pages 111-119.

    More about this item

    Keywords

    mortgage choice; mortgage contracts; household finances; fixed-rate; adjustable-rate;
    All these keywords.

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R2 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedfwp:2014-05. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Federal Reserve Bank of San Francisco Research Library (email available below). General contact details of provider: https://edirc.repec.org/data/frbsfus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.