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Pricing Adjustable Rate Mortgages

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  • Patric H. Hendershott

Abstract

This paper provides a framework for pricing adjustable rate mortgages and summarizes some evidence on the prices (additions to the coupon rate) necessary to cover expected losses from binding of varios interest rate caps and from mortgage default and foreclosure. Both interst rate and default risk are shown to be heavily inluenced by the form of the mortgage instrument as well as the underlying drift and uncertainty in interest rates and house prices.

Suggested Citation

  • Patric H. Hendershott, 1985. "Pricing Adjustable Rate Mortgages," NBER Working Papers 1548, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1548
    Note: ME
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    References listed on IDEAS

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    1. Stephen A. Buser & Patric H. Hendershott & Anthony B. Sanders, 1984. "Pricing Rate Caps on Default-Free Adjustable-Rate Mortgages," NBER Working Papers 1525, National Bureau of Economic Research, Inc.
    2. Patric H. Hendershott & Kevin E. Villani, 1980. "Residential Mortgage Markets and the Cost of Mortgage Funds," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 8(1), pages 50-76, March.
    3. Donald F. Cunningham & Patric H. Hendershott, 1984. "Pricing FHA Mortgage Default Insurance," NBER Working Papers 1382, National Bureau of Economic Research, Inc.
    4. Patric H. Hendershott & Kevin E. Villani, 1981. "Savings and Loan Usage of the Authority to Invest in Corporate Debt," NBER Working Papers 0725, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Patric H. Hendershott, 1986. "Mortgage Pricing: What Have We Learned So Far?," NBER Working Papers 1959, National Bureau of Economic Research, Inc.
    2. Patric H. Hendershott & James D. Shilling, 1991. "The Continued Interest-Rate Vulnerability of Thrifts," NBER Chapters, in: Financial Markets and Financial Crises, pages 259-282, National Bureau of Economic Research, Inc.
    3. Stephen A. Buser & Patric H. Hendershott & Anthony B. Sanders, 1988. "On the Determinants of the Value of Call Options on Default-Free Bonds," NBER Working Papers 2529, National Bureau of Economic Research, Inc.
    4. Anthony Pennington‐Cross & Giang Ho, 2008. "Predatory Lending Laws and the Cost of Credit," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 36(2), pages 175-211, June.
    5. Sprecher, C. R. & Willman, Elliott, 1998. "The Margin Paradox in Adjustable-Rate Mortgages," Journal of Housing Economics, Elsevier, vol. 7(2), pages 180-190, June.
    6. Patric H. Hendershott & William R. Schultz, 1993. "Equity and Nonequity Determinants of FHA Single‐Family Mortgage Foreclosures in the 1980s," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 21(4), pages 405-430, December.
    7. 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.
    8. Eduardo S. Schwartz & Walter N. Torous, 1991. "Caps on Adjustable Rate Mortgages: Valuation, Insurance, and Hedging," NBER Chapters, in: Financial Markets and Financial Crises, pages 283-304, National Bureau of Economic Research, Inc.
    9. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    10. Patric H. Hendershott & Robert Van Order, 1987. "Pricing Mortgages: An Interpretation of the Models and Results," NBER Working Papers 2290, National Bureau of Economic Research, Inc.
    11. Sprecher, C. R. & Willman, Elliott, 2000. "The Role of the Initial Discount in the Pricing of Adjustable-Rate Mortgages," Journal of Housing Economics, Elsevier, vol. 9(1-2), pages 64-75, March.
    12. James D. Shilling & C.F. Sirmans & John D. Benjamin, 1987. "On Option‐Pricing Models in Real Estate: A Critique," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 15(1), pages 742-752, March.
    13. Eddie Lam, 2002. "A Risk Management Model for MBS Issuers," International Real Estate Review, Global Social Science Institute, vol. 5(1), pages 169-195.

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