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Are adjustable-rate mortgage borrowers borrowing constrained?

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Abstract

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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  • Kathleen W. Johnson & Geng Li, 2011. "Are adjustable-rate mortgage borrowers borrowing constrained?," Finance and Economics Discussion Series 2011-21, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2011-21
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    Cited by:

    1. Ghoddusi, Hamed & Afkhami, Mohamad, 2019. "Valuation of mortgage interest deductibility under uncertainty: An option pricing approach," Journal of Economic Dynamics and Control, Elsevier, vol. 103(C), pages 102-122.
    2. Min Qi & Harald Scheule & Yan Zhang, 2021. "Positive Payment Shocks, Liquidity and Refinance Constraints and Default Risk of Home Equity Lines of Credit at End of Draw," The Journal of Real Estate Finance and Economics, Springer, vol. 62(3), pages 423-454, April.
    3. Okechukwu D. Anyamele, 2018. "Racial Ethnic differences in Household Loan Delinquency Rate in recent financial crisis: Evidence from 2007 and 2010 Survey of Consumer Finances," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 8(3), pages 1-4.
    4. Martin Brown & Benjamin Suman Guin, 2015. "The Exposure of Mortgage Borrowers to Interest Rate Risk and House Price Risk – Evidence from Swiss Loan Application Data," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 151(II), pages 3-37, June.
    5. John Y. Campbell & Tarun Ramadorai & Benjamin Ranish, 2012. "How Do Regulators Influence Mortgage Risk: Evidence from an Emerging Market," NBER Working Papers 18394, National Bureau of Economic Research, Inc.
    6. 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.
    7. Ronel Elul & Sebastian Tilson, 2015. "Owner occupancy fraud and mortgage performance," Working Papers 15-45, Federal Reserve Bank of Philadelphia.
    8. Brown, Martin & Guin, Benjamin, 2015. "The Exposure of Mortgage Borrowers to Interest Rate Risk, Income Risk and House Price Risk – Evidence from Swiss Loan Application Data," Working Papers on Finance 1509, University of St. Gallen, School of Finance.
    9. John Y. Campbell & Tarun Ramadorai & Benjamin Ranish, 2015. "The Impact of Regulation on Mortgage Risk: Evidence from India," American Economic Journal: Economic Policy, American Economic Association, vol. 7(4), pages 71-102, November.
    10. 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.

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    Keywords

    adjustable-rate mortgages; Mortgage loans; Consumer credit; Consumer behavior;
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