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Mortgage choice and the pricing of fixed-rate and adjustable-rate mortgages

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  • John Krainer

Abstract

In the United States throughout 2009, the share of adjustable-rate mortgages among total mortgage originations was very low, apparently reflecting the attractive pricing of fixed-rate mortgages relative to ARMs. Government policy could have changed the relative attractiveness of the fixed-rate mortgages and ARMs, thereby shifting the market share of these two housing finance instruments. ; This Economic Letter reviews some of the factors determining consumer mortgage choices. It shows that ARM share has declined in ways that parallel the behavior of several key mortgage market interest rates. These developments have coincided with, among other things, Fed intervention in the market through large-scale MBS purchases. Thus, the Fed program, while supporting the functioning of the residential mortgage market overall, could have affected the composition of the mortgage market. To help understand this dynamic, this Letter estimates what the ARM share might have been under alternative scenarios in which fixed mortgage rates were higher, which would likely have been the case if the Fed had not been intervening in the market to the extent that it did.

Suggested Citation

  • John Krainer, 2010. "Mortgage choice and the pricing of fixed-rate and adjustable-rate mortgages," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue feb1.
    • Handle: RePEc:fip:fedfel:y:2010:i:feb1:n:2010-03
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    Citations

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    Cited by:

    1. Oliner, Stephen D. & Peter, Tobias J. & Pinto, Edward J., 2020. "The Wealth Building Home Loan," Regional Science and Urban Economics, Elsevier, vol. 80(C).
    2. Heike Joebges & Sebastian Dullien & Alejandro Márquez-Velázquez, 2015. "What causes housing bubbles?," IMK Studies 43-2015, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    3. Cóndor Richard, 2019. "Measuring the cost of U.S. housing policy," Working Papers 2019-08, Banco de México.
    4. Devine, Kenneth & McCarthy, Yvonne & O’Toole, Conor, 2023. "The role of borrower expectations in mortgage choice," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 107(C).
    5. Contessi, Silvio & De Pace, Pierangelo & Guidolin, Massimo, 2014. "How did the financial crisis alter the correlations of U.S. yield spreads?," Journal of Empirical Finance, Elsevier, vol. 28(C), pages 362-385.
    6. 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.
    7. Tatiana Cesaroni, 2022. "Average time to sell a property and credit conditions: Evidence from the Italian housing market survey," Bulletin of Economic Research, Wiley Blackwell, vol. 74(1), pages 49-68, January.
    8. Heike Joebges & Sebastian Dullien & Alejandro Márquez-Velázquez, 2015. "What causes housing bubbles? A theoretical and empirical inquiry," Competence Centre on Money, Trade, Finance and Development 1501, Hochschule fuer Technik und Wirtschaft, Berlin.
    9. Hancock, Diana & Passmore, Wayne, 2016. "Cost of funds indexed mortgage contracts with government-backed catastrophic insurance (COFI-Cats): A realistic alternative to the 30-year fixed-rate mortgage?," Journal of Economics and Business, Elsevier, vol. 84(C), pages 109-130.

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    Keywords

    Mortgage loans; Mortgages;

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