The Termination of Subprime Hybrid and Fixed Rate Mortgages

FRB of St. Louis Working Paper No. 2006-042A

38 Pages Posted: 17 Jul 2006

See all articles by Anthony Pennington-Cross

Anthony Pennington-Cross

Marquette University - Dept. of Finance

Giang Ho

University of California, Los Angeles (UCLA)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2006

Abstract

Adjustable rate and hybrid loans have been a large and important component of subprime lending in the mortgage market. While maintaining the familiar 30-year term the typical adjustable rate loan in subprime is designed as a hybrid of fixed and adjustable characteristics. In its most prevalent form, the first two years are typically fixed and the remaining 28 years adjustable. Perhaps not surprisingly, using a competing risks proportional hazard framework that also accounts for unobserved heterogeneity, hybrid loans are sensitive to rising interest rates and tend to temporarily terminate at much higher rates when the loan transforms into an adjustable rate. However, these terminations are dominated by prepayments not defaults.

Keywords: Mortgage, default, prepayment, subprime, adjustable Rate, hybrid

JEL Classification: G21, D14, R29

Suggested Citation

Pennington-Cross, Anthony N. and Ho, Giang, The Termination of Subprime Hybrid and Fixed Rate Mortgages (July 2006). FRB of St. Louis Working Paper No. 2006-042A, Available at SSRN: https://ssrn.com/abstract=916098 or http://dx.doi.org/10.2139/ssrn.916098

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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