A Note on Hybrid Mortgages
Brent W. Ambrose
Pennsylvania State University
California State University at Fullerton
Zsuzsa R. Huszar
National University of Singapore; National University of Singapore (NUS) - Risk Management Institute; National University of Singapore (NUS) - Institute of Real Estate Studies
September 3, 2004
We extend the work of Ambrose and LaCour-Little (2001) on traditional one-year adjustable rate mortgages by analyzing the performance of 3/27 hybrid instruments. Under this contract innovation, which first appeared in the mid-1990s, note rates are fixed for three years after which they convert to a traditional one-year adjustment schedule. We find high rates of prepayment, particularly at time of initial rate adjustment, and relatively high rates of default, as would be consistent with the payment shock that often affects adjustable rate loans.
Number of Pages in PDF File: 26
Keywords: adjustable rate mortgage, prepayment, default
JEL Classification: C52, G21
Date posted: September 17, 2004
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