The Termination of Subprime Hybrid and Fixed-Rate Mortgages

28 Pages Posted: 18 Aug 2010

See all articles by Anthony Pennington-Cross

Anthony Pennington-Cross

Marquette University - Dept. of Finance

Giang Ho

University of California, Los Angeles (UCLA)

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Abstract

Adjustable-rate and hybrid loans have been a larger component of subprime mortgage lending in the mortgage market than prime lending. The typical adjustable-rate loan in subprime is a hybrid of fixed and adjustable characteristics in which the first 2 years are fixed and the remaining 28 years adjustable. Hybrid loans terminate at elevated probabilities even before the first adjustment date. Hybrid loan terminations are sensitive to interest rates and teaser rates (payment shocks). Default probabilities increase dramatically when payment shocks are mixed with low or no equity in the home. This is the mixture of events that helped to trigger the 2007/2008 subprime mortgage crisis.

Suggested Citation

Pennington-Cross, Anthony N. and Ho, Giang, The Termination of Subprime Hybrid and Fixed-Rate Mortgages. Real Estate Economics, Vol. 38, No. 3, pp. 399-426, Fall 2010, Available at SSRN: https://ssrn.com/abstract=1660737 or http://dx.doi.org/10.1111/j.1540-6229.2010.00271.x

Anthony N. Pennington-Cross (Contact Author)

Marquette University - Dept. of Finance ( email )

P.O. Box 1881
Milwaukee, WI 53201-1881
United States

Giang Ho

University of California, Los Angeles (UCLA) ( email )

405 Hilgard Avenue
Box 951361
Los Angeles, CA 90095
United States

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