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Are adjustable-rate mortgage borrowers borrowing constrained?

  • Kathleen W. Johnson
  • Geng Li
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Past research argues that changes in adjustable-rate mortgage (ARM) payments may lead households to cut back on consumption or to default on their mortgages. In this paper, we argue that these outcomes are more likely if ARM borrowers are borrowing constrained, and find that ARM borrowers exhibit characteristics and behavior that are consistent with being borrowing constrained. Although the demographic and financial characteristics of ARM and fixed-rate mortgage (FRM) borrowers are quite similar, ARM borrowers differ from FRM borrowers in their uses of credit and attitudes towards it. In addition, we find the consumption growth of households with an ARM is more sensitive to past income than the consumption growth of other households, suggesting the ARM borrowers are more likely subject to borrowing constraints that hinder their ability to smooth consumption.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2011-21.

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Date of creation: 2011
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Handle: RePEc:fip:fedgfe:2011-21
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  1. Brahima Coulibaly & Geng Li, 2007. "Choice of mortgage contracts: evidence from the Survey of Consumer Finances," Finance and Economics Discussion Series 2007-50, Board of Governors of the Federal Reserve System (U.S.).
  2. Posey, Lisa L. & Yavas, Abdullah, 2001. "Adjustable and Fixed Rate Mortgages as a Screening Mechanism for Default Risk," Journal of Urban Economics, Elsevier, vol. 49(1), pages 54-79, January.
  3. Jappelli, Tullio & Pischke, Jörn-Steffen & Souleles, Nicholas, 1995. "Testing for Liquidity Constraints in Euler Equations with Complementary Data Sources," CEPR Discussion Papers 1138, C.E.P.R. Discussion Papers.
  4. Jappelli, Tullio, 1990. "Who Is Credit Constrained in the U.S. Economy?," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 219-34, February.
  5. 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.
  6. Kathleen W. Johnson & Geng Li, 2010. "The Debt-Payment-to-Income Ratio as an Indicator of Borrowing Constraints: Evidence from Two Household Surveys," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(7), pages 1373-1390, October.
  7. 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.
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