Mortgage Choice Research Articles

Consumer Engagement with Financial Content: A Review of Media Influence on Mortgage Decision-Making.

This review examines the multifaceted role of media in shaping consumer engagement with financial content, particularly in the realm of mortgage decision-making. Drawing from a diverse array of studies, it is noted that "media can significantly affect how consumers perceive and process financial information" (Lusardi & Mitchell, 2014). This review critically evaluates how various media forms—from traditional print to digital platforms—impact consumer behavior within the mortgage market. The review is thematically organized to elucidate key findings on media’s impact on decision-making, identify significant gaps in existing research, and highlight crucial areas warranting further exploration. Conclusively, it asserts that while media significantly influences mortgage choices, there remains an urgent need for enhanced financial education and critical engagement among consumers. "The implications for practitioners and policymakers are discussed, alongside proposed directions for future research endeavors" (Gathergood & Weber, 2014).

Mortgage choice and inflation experiences in the Eurozone

In the Eurozone, households’ mortgage preferences vary widely, both within and across countries. This persistent heterogeneity in the choice between an adjustable rate mortgage (ARM) and a fixed rate mortgage (FRM) two decades after introducing a common currency is a puzzle. We argue that these patterns relate to the long-lasting effect of personal experiences of high-inflation periods. Analysing rich household data across 9 countries, we show that higher lifetime experienced inflation predicts significantly lower probability of holding an FRM: a 1 log-point increase in experienced inflation predicts a 71% decrease in the odds of holding an FRM. We relate our findings to existing theories on household mortgage risk management and argue that Eurozone prepayment penalties heighten the ‘inflation risk’ associated with FRMs. We also find that past personal inflation experiences are associated to risk aversion: households with histories of high and volatile inflation report lower willingness to take financial risk.

The role of borrower expectations in mortgage choice

This paper analyses the role of interest rate expectations in determining a household’s selection of mortgage product. We use a bespoke survey of 2,003 mortgage holders conducted by the Central Bank of Ireland to investigate the choice between safe fixed-rate and risky adjustable rate products. Our empirical methodology adopts a probit model to estimate the effect of a series of household characteristics, behavioural influences and mortgage criteria on product selection. This research provides novel insights into the determinants of mortgage choice, as our study is the first in the literature to explore expectations utilising a new measurement technique. Our results indicate that while pricing matters, future interest rate expectations are a key motivating factor in the mortgage choice decision. In addition to this, we investigate the accuracy of expectations and find higher levels of education and financial knowledge increase the probability of correct predictions.

Price Discrimination and Mortgage Choice

Price Discrimination and Mortgage Choice

Popular Personal Financial Advice versus the Professors

I survey the advice given by the fifty most popular personal finance books and compare it to the prescriptions of normative academic economic models. Popular advice frequently departs from normative principles derived from economic theory, which should motivate new hypotheses about why households make the financial choices they do, as well as what financial choices households should make. Popular advice is sometimes driven by fallacies, but it tries to take into account the limited willpower individuals have to stick to a financial plan, and its recommended actions are often easily computable by ordinary individuals. I cover advice on savings rates, the advisability of being a wealthy hand-to-mouth consumer, asset allocation, non-mortgage debt management, simultaneous holding of high-interest debt and low-interest savings, and mortgage choices.

Descending from the Ivory Tower: My Adventures in Fintech

Dabbling in fintech with optimal mortgage choice and swap valuation as cases

The Role of Borrower Expectations in Mortgage Choice

The Role of Borrower Expectations in Mortgage Choice

FBBVA Lecture 2020Exposure, Experience, and Expertise: Why Personal Histories Matter in Economics

AbstractPersonal experiences of economic outcomes, from global financial crises to individual-level job losses, can shape individual beliefs, risk attitudes, and choices for years to come. A growing literature on experience effects shows that individuals act as if past outcomes that they experienced were overly likely to occur again, even if they are fully informed about the actual likelihood. This reaction to past experiences is long-lasting though it decays over time as individuals accumulate new experiences. Modern brain science helps understand these processes. Evidence on neural plasticity reveals that personal experiences and learning alter the strength of neural connections and fine-tune the brain structure to those past experiences (“use-dependent brain”). I show that experience effects help understand belief formation and decision-making in a wide range of economic applications, including inflation, home purchases, mortgage choices, and consumption expenditures. I argue that experience-based learning is broadly applicable to economic decision-making and discuss topics for future research in education, health, race, and gender economics.

Household Finance

Household financial decisions are complex, interdependent, and heterogeneous, and central to the functioning of the financial system. We present an overview of the rapidly expanding literature on household finance (with some important exceptions) and suggest directions for future research. We begin with the theory and empirics of asset market participation and asset allocation over the life cycle. We then discuss household choices in insurance markets, trading behavior, decisions on retirement saving, and financial choices by retirees. We survey research on liabilities, including mortgage choice, refinancing, and default, and household behavior in unsecured credit markets, including credit cards and payday lending. We then connect the household to its social environment, including peer effects, cultural and hereditary factors, intra-household financial decision-making, financial literacy, cognition, and educational interventions. We also discuss literature on the provision and consumption of financial advice. (JEL D15, G41, G50, J26, Z13)

Price discrimination and mortgage choice

We characterise the large number of mortgage offers for which people qualify. Almost no one picks the cheapest option, nonetheless the one selected is not usually much more expensive. A few borrowers make very expensive choices. These big mistakes are most common when the menu they face has many expensive options, and are most likely for high loan to value and loan to income borrowers. Young people and first-time buyers are more mistake-prone. The dispersion in the mortgage menu is consistent with banks attempting to price discriminate for some borrowers who might pick poorly while competing for others who might shop more effectively.

Exposure, Experience, and Expertise: Why Personal Histories Matter in Economics

Abstract Personal experiences of economic outcomes, from global financial crises to individual-level job losses, can shape individual beliefs, risk attitudes, and choices for years to come. A growing literature on experience effects shows that individuals act as if past outcomes that they experienced were overly likely to occur again, even if they are fully informed about the actual likelihood. This reaction to past experiences is long-lasting though it decays over time as individuals accumulate new experiences. Modern brain science helps understand these processes. Evidence on neural plasticity reveals that personal experiences and learning alter the strength of neural connections and fine-tune the brain structure to those past experiences (“use-dependent brain”). I show that experience effects help understand belief formation and decision-making in a wide range of economic applications, including inflation, home purchases, mortgage choices, and consumption expenditures. I argue that experience-based learning is broadly applicable to economic decision-making and discuss topics for future research in education, health, race, and gender economics.

International Real Estate Review

The global economy is in the midst of a recession triggered by the ongoing pandemic of a novel coronavirus disease (COVID-19). The shutdown of the economy and a surge in the unemployment rate also cause stress to the US housing and mortgage system and create significant impacts on the default behaviour of mortgage borrowers. The potential rise in mortgage defaults may renew the long-standing debate over the empirical observation of why some mortgage borrowers do not default as "ruthlessly¨ as the finance theory predicts. In this paper, we propose an alternative theory to explain for the different default behaviours among mortgage borrowers. We hypothesize that the difference among time preferences across mortgage choices is one of the underlying factors that causes the heterogeneity in default patterns. Borrowers can either have a present-biased preference (overvaluing immediate outcomes), or a time-consistent preference (with standard exponential discounting). Borrowers with a present-biased preference are more likely to accept back-loaded mortgages that minimize up-front costs, even though this increases their risk of going ¡§underwater¡¨ and entering default when an adverse shock, such as the one from the ongoing pandemic, occurs.

A Study on Determinants of Households’ Intentions on Mortgage Loan and Choice between FRM and ARM

A Study on Determinants of Households’ Intentions on Mortgage Loan and Choice between FRM and ARM

Mortgage Choice and Expenditure Over the Lifecycle: Evidence From Expiring Interest-Only Loans

We study how homeowners’ consumption responds to a negative and anticipated dis- posable income shock: the beginning of the amortization period on interest-only mort- gages. We identify spending behavior through an event study approach, by matching loan-level data that covers the universe of Danish mortgages to detailed administrative registries on borrowers. In response to an average increase in installments worth 9 per- cent of income, consumption drops by 3 percent of income, when amortization begins. The reduction in expenditure is persistent. Borrowers who fail to smooth consumption are highly leveraged and likely to be denied a new interest-only loan, upon expiration.

Valuation of mortgage interest deductibility under uncertainty: An option pricing approach

Abstract We propose a dynamic option pricing model to quantify the tax shield value of US mortgage interest deduction (MID) under uncertainty. We identify non-linear forms, both convex and concave regions, in the pay-off of MID, and discuss the implications for the valuation of MID. The model provides insights regarding the relationship between the effective MID and a set of underlying variables, including income level, house price, mortgage size, and state and local tax rates. We also show how the tax shield value of mortgage loans changes with the volatility of underlying processes. We apply the model to the case of the optimal choice of adjustable versus fixed-rate mortgages and prove that under a mean-preserving interest rate, an adjustable mortgage always offers a bigger tax saving. We use the framework to study how the tax reforms of 2017 have affected the MID benefits of different households, and find that no household is expected to receive a larger mortgage deduction under the new law. Finally, we find that, by putting a cap on deductible state and local taxes, the 2017 reform has significantly reduced the quantitative impact of income and house price volatility on the expected MID value.

The Supply Side of Household Finance

We propose a new, data-based test for the presence of biased financial advice when households choose between fixed and adjustable rate mortgages. If households are wary, the relative cost of the two types should be a sufficient statistic for a household contract choice: the attributes of the bank that makes the loan should play no role. If households rely on banks' advice to guide their choice, banks may be tempted to bias their counsel to their own advantage. In this case bank-specific supply characteristics will play a role in the household's choice above any role they play through relative prices. Testing this hypothesis on a sample of 1.6 million mortgages originated in Italy between 2004 and 2010, we find that the choice between adjustable and fixed rates is significantly affected by change in banks' supply factors, especially in periods during which banks do not change the relative price of the two mortgage types. This supports the view that banks are able to affect customers' mortgage choices not only by pricing but also through an advice channel.

The influence of house, seller, and locational factors on the probability of sale

Ability to model the probability of individual house sales would be of benefit in a number of real estate contexts. Existing housing literature models the probability of a house sale using mainly property characteristics or macroeconomic variables. However, the use of only property characteristics typically yields a poor model fit. This study investigates the relative roles of property characteristics, seller mortgage origination variables, and locational factors in terms of explaining the probability of individual house sales.Homeowner information such as their time horizon of staying in the house and their stage in the life cycle should have an important impact on house sale decisions. Although obtaining such information is typically difficult, mortgage choices made at loan origination may help reveal such information. In addition, the measurable characteristics of neighbors and the geographic clustering of house sales, ceteris paribus, may aid in modeling house sales.Incorporating the property characteristics, mortgage origination variables, and locational factors increases the pseudo-R2 of a probit model from under 1 percent when only using property characteristics to over 23 percent when using property, mortgage, and spatial information. The results are consistent through a particularly large housing cycle in both Las Vegas County in Nevada and Maricopa County in Arizona from 2006 to 2010, and for a variety of sub samples.

Risk Preferences Across Public and Private Sector Employees: Evidence from Mortgage Choices

Public sector employees have long been considered to be more risk-averse when compared with their private sector counterparts. Using data from mortgage applications, we offer novel evidence that casts doubt on this conventional view. We find little, to no, differences between public and private sector employees in terms of their risky mortgage choices. The findings are robust to accounting for potential bias from unobservables and testing alternative measures of mortgage riskiness.

Fixed-Rate Mortgages, Labor Markets, and Efficiency

The paper studies the effects of mortgage choices between fixed-rate mortgages (FRMs) and adjustable-rate mortgages (ARMs) on labor market efficiency. FRMs provide insurance for risk-averse borrowers in the sense that they pay the same rate over time and are not subject to uncertain spot market rates. FRMs, however, discourage borrowers from moving to other regions despite better employment opportunities, as they terminate the FRM contracts in order to move and their new loan interests may be higher. As FRM-borrowers do not move to other regions due to the interest lock-ins, entrepreneurs in other regions lose the potential surpluses from productive matches that would have occurred between borrowers-workers and entrepreneurs. Borrowers ignore this negative externality they impose on the entrepreneurs when choosing their mortgages, and too many borrowers choose FRMs relative to the efficient level. If FRMs are eliminated and ARM-insurance (that protects ARM-borrowers against uncertain adjustable interest rates) is created, it will improve efficiency. The paper also assesses quantitatively the welfare effects of eliminating FRMs and providing ARM-insurance.

Endogeneity in household mortgage choice

We show that failing to correct for both sample selection and endogeneity bias leads to an under-estimate of the importance of mortgage price in determining the mortgage product a household selects. With proprietary, loan-level data from a major Australian mortgage provider we study interest rate determination, loan size and mortgage product choice. The level of mortgage indebtedness varies with the value and characteristics of the property, while individual mortgage interest rates depend on borrower characteristics. Our results show that borrowers consider the initial interest rate and implicitly the loan amount they can access when choosing a mortgage product.