Distributional Consequences of Alternative Mortgage Instruments

One of the major factors hindering the introduction of alternative mortgage instruments is the possibility of adverse consequences to certain groups of households seeking to obtain credit for homeownership. This study examines this issue through an analysis of cross‐sectional household data obtained from the 1970 Survey of Consumer Finances. Using multiple regression analysis, a series of structural demand models are derived and estimated. These models relate the probability of homeownership, levels of housing consumption, mortgage credit usage, and downpayment to income, assets, and other socioeconomic variables, to variables representing the relative price of housing and homeownership, and to certain variables representing the present value and cash flow costs of mortgage credit. Several mortgage‐related variables are found to be influential in housing demand decisions. These models are then used to simulate alternative instrument introduction. The graduated‐payment and price‐level adjusted mortgages are predicted to be superior to the current instrument of mortgage finance in encouraging homeownership, housing consumption, and the use of mortgage credit among all household classes. The standard variable‐rate mortgage, especially one tied to a short‐term interest rate, is predicted to be inferior to the standard instrument, with the most adverse impacts upon lower‐income, young, elderly, and black households.