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Estimating the marginal contribution of adjustable-rate mortgage selection to termination probabilities in a nested model |
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| Authors: | Charles A Capone Jr Donald F Cunningham |
| Institution: | (1) Department of Economics, Baylor University, 76798-8003 Waco, TX, USA;(2) U.S. Department of Housing and Urban Development, Office of Policy Development & Research, 451 7th St. SW, 20410 Washington, DC, USA;(3) Department of Finance, Baylor University, 76798-8004 Waco, TX, USA |
| Abstract: | In this study we measure the marginal contribution of ARMs to termination probabilities. To do this we develop a modified nested-logit model of mortgage selection and termination and identify the role of risk aversity in the selection process. Simulations of termination probabilities under different economic scenarios indicate how ARMs decrease overall portfolio risk through declines in prepayment probabilities which more than offset the increases in default probabilities associated with them. |
| Keywords: | Mortgage selection Mortgage termination Borrower risk aversity |
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