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Estimating the Marginal Contribution of Adjustable-Rate Mortgage Selection to Termination Probabilities in a Nested Model

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  • Capone, Charles A, Jr
  • Cunningham, Donald F

Abstract

In this study we measure the marginal contribution of ARMs to termination probabilities. To do this we develop a modified nested-logit model of mortgage selection and termination and identify the role of risk aversity in the selection process. Simulations of termination probabilities under different economic scenarios indicate how ARMs decrease overall portfolio risk through declines in prepayment probabilities which more than offset the increases in default probabilities associated with them. Copyright 1992 by Kluwer Academic Publishers

Suggested Citation

  • Capone, Charles A, Jr & Cunningham, Donald F, 1992. "Estimating the Marginal Contribution of Adjustable-Rate Mortgage Selection to Termination Probabilities in a Nested Model," The Journal of Real Estate Finance and Economics, Springer, vol. 5(4), pages 333-356, December.
    • Handle: RePEc:kap:jrefec:v:5:y:1992:i:4:p:333-56
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    Cited by:

    1. Archer, Wayne R. & Ling, David C. & McGill, Gary A., 1996. "The effect of income and collateral constraints on residential mortgage terminations," Regional Science and Urban Economics, Elsevier, vol. 26(3-4), pages 235-261, June.
    2. deRitis, Cristian & Kuo, Chionglong & Liang, Yongping, 2010. "Payment shock and mortgage performance," Journal of Housing Economics, Elsevier, vol. 19(4), pages 295-314, December.
    3. Dungey, Mardi & Doko Tchatoka, Firmin & Yanotti, María B., 2018. "Using multiple correspondence analysis for finance: A tool for assessing financial inclusion," International Review of Financial Analysis, Elsevier, vol. 59(C), pages 212-222.
    4. William D. Larson & Christos Makridis & Chad Redmer, 2021. "Borrower Expectations and Mortgage Performance: Evidence from the COVID-19 Pandemic," FHFA Staff Working Papers 21-02, Federal Housing Finance Agency.
    5. Raymond Chiang & Thomas F. Gosnell & Andrea J. Heuson, 1997. "Evaluating the Interest-Rate Risk of Adjustable-Rate Mortgage Loans," Journal of Real Estate Research, American Real Estate Society, vol. 13(1), pages 77-94.
    6. Dungey, Mardi & Doko Tchatoka, Firmin & Yanotti, María B., 2018. "Endogeneity in household mortgage choice," Economic Modelling, Elsevier, vol. 73(C), pages 30-44.
    7. Hendershott, Patric H. & LaFayette, William C. & Haurin, Donald R., 1997. "Debt Usage and Mortgage Choice: The FHA-Conventional Decision," Journal of Urban Economics, Elsevier, vol. 41(2), pages 202-217, March.
    8. Archer, Wayne R. & Ling, David C. & McGill, Gary A., 1997. "Demographic versus Option-Driven Mortgage Terminations," Journal of Housing Economics, Elsevier, vol. 6(2), pages 137-163, June.
    9. Patric H. Hendershott & William C. LaFayette, 1995. "Debt Usage and Mortgage Choice: Sensitivity to Default Insurance Costs," NBER Working Papers 5069, National Bureau of Economic Research, Inc.

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