The Behavioral Law and Economics of Fixed-Rate Mortgages (and Other Just-So Stories)

71 Pages Posted: 15 Oct 2014

See all articles by Todd J. Zywicki

Todd J. Zywicki

George Mason University - Antonin Scalia Law School; PERC - Property and Environment Research Center

Date Written: October 13, 2014


A major cause of the recent financial crisis was the traditional American mortgage, which is distinctive for the following features: it is a thirty-year, self-amortizing loan with an unlimited right to prepay. The United States is unique in the world for standardizing on a mortgage product with these features. Yet not only have a majority of the foreclosures that occurred during the financial crisis been fixed-rate mortgages, the fixed-interest-rate characteristics have undermined efforts by the Federal Reserve and government to assist recovery of the housing market. Moreover, the long fixed-rate term and ability to refinance are highly expensive and suboptimal features for many consumers. Nevertheless, many consumers persist in purchasing this mortgage. Drawing on the methodology of behavioral law and economics, this article provides rationalizations for how behavioral law and economics can explain the persistence of a product that is so harmful to many consumers and to the economy at large. The article then draws conclusions about what this analysis means for the behavioral law and economics research program generally and for the use of behavioral law and economics in government policymaking.

Keywords: behavioral law and economics, consumer behavior, empirical evidence, fixed-rate mortgage, housing finance, overpayment, policymaking, prepayment penalty, rational choice model, testable hypotheses, unintended consequences

JEL Classification: G21, G28, K20

Suggested Citation

Zywicki, Todd J., The Behavioral Law and Economics of Fixed-Rate Mortgages (and Other Just-So Stories) (October 13, 2014). Supreme Court Economic Review, Vol. 21, p. 157, 2014, George Mason Law & Economics Research Paper No. 14-50, Available at SSRN:

Todd J. Zywicki (Contact Author)

George Mason University - Antonin Scalia Law School ( email )

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