Journal of Financial Intermediation Vol. 2 No. 4 1992
Borrower mobility, self-selection, and the relative prices of fixed- and adjustable-rate mortgages
Abstract
This paper analyzes the effect of borrower self-selection between fixed- and adjustable-rate mortgages (FRMs and ARMS) on the pricing of FRMs. Self-selection occurs according to borrower mobility, with the most mobile borrowers favoring ARMS and less mobile borrowers choosing FRMs. The FRM interest rate depends on the average mobility of the FRM borrower pool, which determines the average duration of FRM loans. Comparative-static analysis of the equilibrium shows that any exogenous change that increases the relative attractiveness of FRMs enlarges the FRM borrower pool, which lowers its average mobility, shortens the duration of FRM loans, and thus reduces their price. Thus, an increase in the demand for FRMs actually reduces the FRM interest rate.
- DOI
- 10.1016/1042-9573(92)90011-2
- Volume
- 2
- Issue
- 4
- Pages
- 401-421
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref