A Note on Hybrid Mortgages
26 Pages Posted: 17 Sep 2004
Date Written: September 3, 2004
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.
Keywords: adjustable rate mortgage, prepayment, default
JEL Classification: C52, G21
Suggested Citation: Suggested Citation
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