The Termination of Subprime Hybrid and Fixed-Rate Mortgages

Adjustable‐rate and hybrid loans have been a larger component of subprime mortgage lending in the mortgage market than prime lending. The typical adjustable‐rate loan in subprime is a hybrid of fixed and adjustable characteristics in which the first 2 years are fixed and the remaining 28 years adjus...

Full description

Saved in:
Bibliographic Details
Published in:Real estate economics 2010-09, Vol.38 (3), p.399-426
Main Authors: Pennington-Cross, Anthony, Ho, Giang
Format: Article
Language:English
Subjects:
Adjustable rate mortgages
ARM
Default
Economic crisis
Fixed rates
Mortgage rates
Mortgages
Studies
Subprime lending
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:Adjustable‐rate and hybrid loans have been a larger component of subprime mortgage lending in the mortgage market than prime lending. The typical adjustable‐rate loan in subprime is a hybrid of fixed and adjustable characteristics in which the first 2 years are fixed and the remaining 28 years adjustable. Hybrid loans terminate at elevated probabilities even before the first adjustment date. Hybrid loan terminations are sensitive to interest rates and teaser rates (payment shocks). Default probabilities increase dramatically when payment shocks are mixed with low or no equity in the home. This is the mixture of events that helped to trigger the 2007/2008 subprime mortgage crisis.
ISSN:1080-8620
1540-6229
DOI:10.1111/j.1540-6229.2010.00271.x