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Self‐Selection in the Fixed‐Rate Mortgage Market

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  • T. L. Tyler Yang

Abstract

This paper analyzes the effect of information asymmetry between the lender and the borrower (i.e., the borrower knows how long he will reside in his home, whereas the lender does not) on the borrower's choice among the interest rate‐discount points combinations available in the fixed‐rate mortgage market. The analysis shows that if the rate‐points trade‐off of the mortgage menu is either too steep or too flat, then all types of borrowers will choose the same loan contract from the menu. In addition, if the rate‐points trade‐off is not convex to the origin, then only the contracts with extreme rate‐points combinations will be chosen by borrowers; all contracts with intermediate rate‐points combinations are redundant and will not be chosen by any borrowers. Intermediate rate‐points combination mortgage contracts would be chosen by some borrowers only if the mortgage menu were to provide a self‐selection function. Several necessary conditions of a self‐selection mortgage menu are depicted.

Suggested Citation

  • T. L. Tyler Yang, 1992. "Self‐Selection in the Fixed‐Rate Mortgage Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 20(3), pages 359-391, September.
    • Handle: RePEc:bla:reesec:v:20:y:1992:i:3:p:359-391
    DOI: 10.1111/1540-6229.00588
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    Cited by:

    1. Chan, Sewin, 1996. "Residential mobility and mortgages," Regional Science and Urban Economics, Elsevier, vol. 26(3-4), pages 287-311, June.
    2. Danny Ben-Shahar, 2006. "Screening Mortgage Default Risk: A Unified Theoretical Framework," Journal of Real Estate Research, American Real Estate Society, vol. 28(3), pages 215-240.
    3. 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.

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