Outstanding Mortgage Research Articles

An analysis of variable rate residential mortgage prepayment in Hong Kong using aggregate data

A distinctive feature of mortgages as assets is the existence of prepayment risk, typically viewed as a borrower’s call option to pay the outstanding mortgage balance at any time during the term. While previous research identified important causes for prepayment, these studies are mostly based on fixed‐rate mortgages, with little work on variable‐rate or floating‐rate mortgages and even less work on prepayment in countries other than the USA. This paper presents an analysis of prepayment based on the historical aggregate pre‐payment experience of a sample of variable rate mortgages in Hong Kong, which func‐tions under a Currency Board Mechanism that determines exogenously the level and term structure of interest rates. With variable rate mortgages, it is expected that there will not be a prepayment incentive with decreases in interest rates, unlike the case with fixed‐rate mortgages. However, we argue that observed interest rate movements remain a key factor that affects prepayment decisions, because current interest changes influence expected future interest rates. Furthermore, drawing on quasi‐rational and behavioral economics concepts, we expect the effect on prepayment of expected upward movement in interest rates to be stronger than that of expected downward movements. Empirical evidence from the adjustable rate residential mortgage sample from Hong Kong supports these expected relationships.

Does Mortgage Hedging Amplify Movements in Long-Term Interest Rates?

The growth of the mortgage market in recent years raises the question of what effects, if any, the hedging of mortgage portfolios has on the behavior of long-term interest rates. The evidence here is that the ten-year swap rate implied by swaptions becomes more volatile when the prepayment risk of outstanding mortgages increases—most likely because investors expect the hedging of prepayment risk to amplify future interest rate movements. These amplification effects can be considerable, but they are generally expected to persist for only several months.

Does Mortgage Hedging Amplify Movements in Long-term Interest Rates?

The growth of the mortgage market in recent years has raised the question of what effects, if any, the hedging of mortgage portfolios has on the behavior of long-term interest rates. This paper finds that the volatility of the ten-year swap rate implied by swaptions increases when the prepayment risk of outstanding mortgages increases--most likely because investors expect the hedging of prepayment risk to amplify future interest rate movements. These amplification effects can be considerable in magnitude, but they are generally expected to persist only for several months.

Does Mortgage Hedging Amplify Movements in Long-term Interest Rates?

The growth of the mortgage market in recent years has raised the question of what effects, if any, the hedging of mortgage portfolios has on the behavior of long-term interest rates. This paper finds that the volatility of the ten-year swap rate implied by swaptions increases when the prepayment risk of outstanding mortgages increases--most likely because investors expect the hedging of prepayment risk to amplify future interest rate movements. These amplification effects can be considerable in magnitude, but they are generally expected to persist only for several months.

Financial Market Imperfection And Home Ownership: A Comparative Study

We explore the determinants of the international pattern of home ownership using the Luxembourg Income Study (LIS), a collection of microeconomic data on fourteen OECD countries. In most, the cross-section is repeated over time and includes several demographic variables carefully matched between the different surveys. This allows us to construct a truly unique international dataset, merging data on more than 400,000 households with aggregate panel data on mortgage loans and down payment ratios. After controlling for demographic characteristics, country effects, cohort effects and calendar time effects, we find strong evidence that the availability of mortgage finance - as measured by outstanding mortgage loans and down payment ratios - affects the age-profile of home ownership, especially at the young end. The results have important implications for the debate on the relationship between saving and growth.

Can Americans Afford to Retire? New Evidence on Retirement Saving Adequacy

INTRODUCTION The United States experienced a substantial risk transfer from the individual to the group in the arena over the last half century, with the development of massive government institutions such as social security and employer sponsored defined benefit pension plans, to protect consumption in old age. This pattern has now reversed, with new pension and saving vehicles transferring the responsibility for planning and its associated risks back to individual households. Are ready, and able, to assume this increased responsibility for their financial well being as they age? In this paper we describe, and evaluate, patterns in asset accumulation through review of prior literature, and our own analyses of a national sample of households on the verge of retirement. We offer an assessment of the claim that Americans do a poor job of preparing for retirement and some justification of why this may be the case. Our second goal is to evaluate patterns of asset decumulation, in order to determine whether the available financial (and other) tools are available to achieve satisfactory consumption during retirement. Finally, we outline approaches to assist in improving the targeting and management of accumulation and decumulation paths. How MUCH RETIREMENT WEALTH DO PEOPLE HAVE? Deciding whether people will have enough for requires evidence on saving patterns of workers as they age, as well as on their income needs. In this section we ask whether actual saving patterns are likely to be enough to protect retiree economic security. To this end we examine a nationally representative dataset of on the verge of retirement, the Health and Retirement Study (HRS), covering over 7600 households in 1992, where at least one family member was between the ages of fifty-one and sixty-one.(1) A summary of the evidence on wealth accumulations by type appears in Table 1.(2) Mean values, the average for the median ten percent of households, and averages for those households reporting each wealth source appear, along with the percentages of total wealth each asset class represents. Wealth in the study is divided into three categories:(3) (1) Financial wealth, which includes business assets, financial assets (such as stocks, bonds, and bank accounts less outstanding debt), dedicated assets including IRA and Keogh Accounts, and miscellaneous other financial assets; (2) Net home equity for homeowners equals the market value of owner-occupied housing less outstanding mortgage debt; and (3) Retirement wealth, equal to the actuarial present value of future social security and survivor benefits and pension benefits. The evidence shows that the average HRS household has just under half a million dollars in total wealth. Total wealth for the median ten percent of households (i.e., the group between the 45th and 55th percentile) is approximately $325,000, slightly more than two-thirds of the mean for the entire sample. The fact that the median is below the mean emphasizes the skewness of the wealth distribution. The composition of total wealth also differs for the mean and median household. For the average HRS household, wealth comprises slightly less than half of total wealth (forty-nine percent), financial wealth just over one-third of total wealth (thirty-seven percent), and the value of housing makes up the remaining fraction (fourteen percent). By contrast, for the median household, wealth comprises three-fifths (sixty-one percent) of total assets, housing accounts for one-fifth (nineteen percent), and financial assets the remaining twenty percent of total wealth. Social security wealth alone makes up forty-one percent of total assets for households near the median, with a value of about $134,000 in present value terms. …

Economic Circumstances of the Beethoven Household in Bonn

A review of contemporary documents suggests that, contrary to wide-spread assertions in the earlier biographical literature, Beethoven did not spend his entire childhood and youth in highly straitened circumstances, let alone in what Alexander Wheelock Thayer and others called "great poverty." His grandfather, as court Kapellmeister and wine dealer, had a substantial income. And Beethoven's father, Johann, earned amounts from his activities as a court musician and teacher normally sufficient to support a family in a modest way. Upon the Kapellmeister's death, on 24 December 1773, Johann became sole heir to a sizable estate, consisting of a legacy in cash, household possessions, accounts receivable, and outstanding loans, advances, and mortgages. In the course of time the inheritance was largely but not entirely dissipated, and, despite the addition of income from Beethoven's own activities as court musician, composer, and virtuoso keyboard performer, the family lived in precarious but not debt-ridden circumstances.

Second mortgages and household saving

Second mortgages accounted for 10.8% of the stock of outstanding mortgage debt at the end of 1987, up from 3.6% at the beginning of the 1980s. This paper investigates the determinants of second mortgage borrowing and the characteristics of second mortgage borrowers. We present cross-sectional evidence suggesting that households with second mortgages are less wealthy than other households: each dollar of second mortgage borrowing is associated with a 75 cent reduction in household net worth. While these results cannot be given a causal interpretation, they are consistent with the view that increased access to second mortgages has reduced personal saving.

Insurance Issues Related to Mortgage Default Risks Associated with Natural Disasters

Mortgage default risks arise from the potential losses faced by financial institutions when borrowers default on their mortgage obligations. Losses can occur if the outstanding mortgage balance exceeds the net proceeds of the sale of the collateralized default property. No losses would occur if the financial institution's net proceeds from selling the property exceed the outstanding mortgage balance. The key variable in the decision to default is the net equity of the mortgagor (homeowner) in the property. The net equity is defined as the property value less any outstanding mortgage balances. When net equity is positive, a homeowner is inclined to sell the property rather than default in order to retain the equity. On the other hand, when the net equity is negative, the inclination for the property owner is to default and pass this negative value onto the mortgagee. I Mortgage default losses can be substantial particularly in times of decreasing property values and/or increasing interest rates. A special subset of mortgage default losses is that associated with properties damaged by natural disasters [24,37]. In this case, the value of the collateralized property has been decreased by the damage. If the damage exceeds the pre-disaster equity of the homeowner, a negative net equity condition would result (see Figure 1).

Consumer Credit in the Affluent Society

A great deal has been written in the past decade or so about the affluence of American society, its increasingly high standard of living and the consumptionorientation of its citizens. One aspect of the affluent society, however, that has gone largely unnoticed by sociologists is the extent to which it rests upon the institution of consumer credit. It can truly be said that the affluent society is also a credit society. The attitudes of Americans toward debt have undergone a remarkable change within the lifetimes of many of us. Whereas not too long ago, debt was viewed as the mark of the imprudent or poverty-stricken man, today it is part of the American way of life. Consumer credit takes a number of different forms. By far the largest category, and the one we are most accustomed to, is mortgage debt. Outstanding mortgage debt has grown tremendously in the last few decades as government-backed lowinterest loans have made it possible for vast numbers of families to realize their great ambition of home ownership. From I950 to the second quarter of I968, nonfarm mortgage debt grew from $45 billion to $243.4 billion.1 Whereas forty-four per cent of American homes were mortgaged in I950, fifty-seven per cent were mortgaged in 1960, and the figure is undoubtedly much higher today.2 In all accountings of consumer debt by economists and government, mortgage debt is sharply differentiated from other kinds, partly because it is long-term and partly because the purchase of a house is seen as an investment rather than as purely consumption. The other kinds of consumer credit are referred to as personal debt or, somewhat confusingly, as consumer debt, the term now referring to debt other than mortgages. In this more narrow sense, consumer credit covers short-term noninstallment debt and somewhat longer-term installment debt. Noninstallment debt includes charge accounts, debts for professional services, and that new institution, the credit card. Of particular significance has been the rapid development of installment credit, the kind of credit for which the consumer pays a fee for the privilege of paying the

The Investment Research Program of the Life Insurance Association of America

The life insurance companies are today, and have been historically, one of the principal financial institutions in the United States, along with the commercial banks, the savings and loan associations, the mutual savings banks, and the corporate pension funds. The volume of new savings accumulated by the public through life companies now exceeds $6 billion per annum, and the gross cash flow through life companies for long-term investment (taking account not only of new savings but also repayments on outstanding invested assets and sales of existing assets) amounts to about $15 billion per year. The total savings accumulated through life insurance over the years amounts to $132 billion, the largest aggregate of savings in any single form in the United States. The following figures will serve to illustrate the importance of life insurance savings in financing the nation's economic growth. During the period 1948-1962, inclusive, American business and industrial corporations increased their bonded indebtedness by $68 billion. Of this total, the life insurance companies added $34 billion to their holdings, or 50 per cent of the total. In addition, during the same period the net increase in outstanding mortgage debt on business and industrial