Adjustable rate mortgages and the mortgage crisis
Purpose – The purpose of this paper is to closely examine adjustable rate mortgages (ARM) made in Northwest Louisiana in order to provide a greater understanding of the causes of the high rate of defaults and potential foreclosures currently being experienced in Louisiana.Design/methodology/approach – The paper examines detailed information for all ARM recorded in a three‐month‐period.Findings – The paper finds that at least half of the loans have highly unfavorable terms with about a third having initial rates that are at least 3 percent higher than prime mortgage rates; these initial rates are likely to increase dramatically during future adjustment periods. Many borrowers also face high interest penalties if they pay back their loans before the first adjustment period. Also notable is the fact that only 7 percent result in foreclosure. While many borrowers receive unfavorable loans, relatively few loans are held for more than six years; a probable explanation is that the borrowers realize they have agr...
Consumer-Revealed Preferences for a Margin and Other Associated Adjustable-Rate Mortgage Features
This paper presents a model of mortgagor-revealed preferences for a margin and other associated adjustable-rate mortgage features estimated empirically from a cross-sectional sample of approved mortgage applications in the United States from 1984-87. It builds on the conclusions of others that mortgage menus create clientele effects because different contracts are designed to induce borrowers to reveal information about their preference structure. The pooled OLS model included numerous mortgage characteristics and produced statistical results that generally supported conventional wisdom concerning borrower behavior.
Foreclosing on Opportunity: State Laws and Mortgage Credit
Foreclosure laws govern the rights of borrowers and lenders when borrowers default on mortgages. In states with laws favoring the borrower, the supply of mortgage credit may decrease because lenders face higher costs. To examine the laws' effects, I compare approved mortgage applications in census tracts that border each other but are located in different states. Using a regression-discontinuity design and semiparametric estimation methods, I find that loan sizes are 3 to 7 smaller in defaulter-friendly states; this result suggests that defaulter-friendly laws impose material costs on borrowers at the time of loan origination.