Valuing Fixed Rate Mortgage Loans with Default and Prepayment Options

Abstract We examine whether unanticipated changes in home values drive spending and mortgage-based equity extraction. To do this, we use longitudinal survey data with subjective information about current and expected future home values to calculate unanticipated home value changes. We link this information at the individual level to high quality administrative records containing information about mortgage borrowing as well as savings in various financial instruments. We find that the marginal propensity to increase mortgage debt is 3%–5% of unanticipated home value gains. We find no adjustment to other components of the portfolio, and we find that mortgage extraction leads to an increase in spending. The effect is driven by young households with high loan-to-value ratios, which is consistent with the effect being driven by collateral constraints. Further, we find that the effect is driven by home owners who actively take out a new mortgage. The price effect is magnified among fixed rate mortgage (FRM) borrowers who have an incentive to refinance their loans to lock in a lower market rate. These results point to the importance of the mortgage market in transforming price increases into spending and suggest that monetary policy can play an important role in transforming housing wealth gains into spending by affecting interest rates on mortgage loans.

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Securitization and the Fixed-Rate Mortgage

Review of Financial Studies ◽

10.1093/rfs/hhu060 ◽

2014 ◽

Vol 28 (1) ◽

pp. 176-211 ◽

Cited By ~ 35

Author(s):

Andreas Fuster ◽

James Vickery

Keyword(s):

Fixed Rate ◽

Fixed Rate Mortgage

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Exploring the Role of Financial Disclosure Forms in Mortgage Type Selection

Journal of Financial Counseling and Planning ◽

10.1891/1052-3073.28.2.285 ◽

2017 ◽

Vol 28 (2) ◽

pp. 285-299

Author(s):

Travis P. Mountain ◽

Michael S. Gutter ◽

Jorge Ruiz-Menjivar ◽

Zeynep Çopur

Keyword(s):

Treatment Group ◽

Federal Reserve ◽

Group Treatment ◽

Financial Disclosure ◽

Fixed Rate ◽

Type Selection ◽

The Difference ◽

Adjustable Rate ◽

Adjustable Rate Mortgage ◽

Fixed Rate Mortgage

The purpose of this study was to determine whether using a financial disclosure form in a controlled setting can influence consumers’ mortgage selection. This study used a 2 × 2 experimental design where participants were assigned randomly to a control or treatment group. Treatment group participants received a Federal Reserve Board document that contained information explaining the difference between an adjustable-rate mortgage (ARM) and a fixed-rate mortgage (FRM). All participants were presented with two distinct scenarios and were asked to determine the most appropriate mortgage for each. Logistic regression results suggested that receiving the Federal Reserve Board document does make a difference in consumers’ mortgage choice in hypothetical scenarios. Financial knowledge and Truth in Lending Act knowledge were also were important predictors.

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