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Residential Mortgage Selection, Inflation Uncertainty, and Real Payment Tilt

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  • Don MacDonald
  • Kimberly Winson-Geideman

Abstract

This study addresses prime and subprime residential mortgage selection in an inflationary environment. Using data from the Mortgage Bankers Association on the proportion of variable rate mortgages closed for the 1994 through 2007 period, the findings show that higher anticipated inflation held with certainty increases the proportion of adjustable-rate mortgage (ARM) originations, while greater inflation uncertainty in the sense of a Diamond-Stiglitz (1974) mean-preserving spread decreases it. Further, the percentage of subprime ARM originations is significantly decreased with greater inflation uncertainty while the impact on prime ARM originations is statistically insignificant. These results are consistent with the hypothesis that prime borrowers hold a valuable exchange option that subprime borrowers do not (i.e., the opportunity to refinance into an alternative mortgage product, if necessary).

Suggested Citation

  • Don MacDonald & Kimberly Winson-Geideman, 2012. "Residential Mortgage Selection, Inflation Uncertainty, and Real Payment Tilt," Journal of Real Estate Research, Taylor & Francis Journals, vol. 34(1), pages 51-72, January.
    • Handle: RePEc:taf:rjerxx:v:34:y:2012:i:1:p:51-72
    DOI: 10.1080/10835547.2012.12091324
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