Why is the Market Share of Adjustable-Rate Mortgages so Low?
11 Pages Posted: 9 Jan 2011
Date Written: December 1, 2010
Over the past several years, U.S. homebuyers have increasingly favored fixed-rate mortgages over adjustable-rate mortgages (ARMs). Indeed, ARMs have dropped to less than 10 percent of all residential mortgage originations, a near-record low. One might speculate that the decline in the ARM share has been driven by "one-off" factors relating to the financial crisis. However, a statistical analysis suggests that recent trends can largely be explained by the same factors that have historically shaped mortgage choice - most notably, the term structure of interest rates and its effects on the relative price of different types of mortgages. Supply-side factors, in particular a rise in the share of mortgages eligible to be securitized by the housing government-sponsored enterprises, also play a role in the low current ARM share.
Keywords: mortgage, fixed-rate mortgage, adjustable-rate mortgage
JEL Classification: G00, G11, G21
Suggested Citation: Suggested Citation