A Note on Hybrid Mortgages

Abstract:     
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

working papers series