A Farewell to ARMs or Ever Changing Market Segments?

Journal of Real Estate Finance and Economics, 59, pages 649–672 (2019)

Posted: 8 Mar 2020

See all articles by Bing Chen

Bing Chen

Shenzhen University

Frank P. Stafford

University of Michigan at Ann Arbor - Department of Economics

Date Written: February 11, 2020

Abstract

The mortgage market has given rise to a changing and diverse set of borrowers actively using ARMs. Data from the Panel Study of income Dynamics (PSID) for 2007 and 2013-2015 are used to study borrowing decisions. One view is that an ARM should be offered and taken by those better able to respond to an upward reset. Yet, favorable economic conditions induce a demand for mortgages, including by higher risk borrowers, and for these households transactions occur at higher rates, often as ARMs, especially as of 2007. Panel analysis confirms some response to the ARMs as a tool for 'affordability' led to actual transaction rates exceeding those for fixed rate mortgages. Analysis confirms substantial payment difficulties. Yet, analysis of mortgage transitions, 2007-13, establishes that the "affordability" component to ARM, though less significant, still was present. ARMs were often taken by minorities and those with less education and with family income under $60,000 per year.

Suggested Citation

Chen, Bing and Stafford, Frank P., A Farewell to ARMs or Ever Changing Market Segments? (February 11, 2020). Journal of Real Estate Finance and Economics, 59, pages 649–672 (2019), Available at SSRN: https://ssrn.com/abstract=3536545

Bing Chen (Contact Author)

Shenzhen University ( email )

3688 Nanhai Road, Nanshan District
Shenzhen, Guangdong 518060
China

Frank P. Stafford

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States

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