Journal of Financial Intermediation Vol. 3 No. 4 1994
Borrower Mobility, Adverse Selection, and Mortgage Points
Abstract
This paper analyzes a simple mobility-based model of mortgage lending and uses the results to illuminate the issue of mortgage points. The model predicts the points/interest-rate trade-off observed in the market, and it also predicts that mobile borrowers choose low-points/high-rate contracts from the available menu, in conformance with conventional wisdom. These outcomes are shown to be a result of adverse selection, which arises because of the lender′s inability to distinguish the mobility characteristics of borrowers. Empirical evidence is also presented showing the presence of a points/interest-rate trade-off in the market. In addition, relying on a proxy variable, the results establish that borrowers choose contracts from this menu according to mobility. Journal of Economic Literature Classification Numbers: G21.
- DOI
- 10.1006/jfin.1994.1012
- Volume
- 3
- Issue
- 4
- Pages
- 416-441
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref