We extend previous research on traditional one-year adjustable-rate mortgages (ARMs) 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 with periodic and lifetime caps. 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.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics