Are Adjustable-Rate Mortgage Borrowers Borrowing Constrained?

Real Estate Economics, Forthcoming

Posted: 27 Nov 2012

See all articles by Kathleen Johnson

Kathleen Johnson

Board of Governors of the Federal Reserve System

Geng Li

Board of Governors of the Federal Reserve System

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Date Written: November 27, 2012

Abstract

Past research argues that changes in adjustable-rate mortgage (ARM) payments may lead households to cut back on consumption. These outcomes are more likely if ARM borrowers are borrowing constrained, and we show in this paper that ARM borrowers exhibit attitudes towards borrowing and behavior that are consistent with being borrowing constrained. Although the demographic and financial characteristics of ARM and fixed-rate mortgage (FRM) borrowers are somewhat similar, ARM borrowers differ from FRM borrowers in their uses of credit and attitudes towards it. In addition, we find the consumption growth of households with an ARM is more sensitive to past income than the consumption growth of other households, suggesting the ARM borrowers may be subject to borrowing constraints that hinder their ability to smooth consumption.

Keywords: Adjustable-Rate Mortgage, Credit Constraints, Consumption Smoothing

JEL Classification: E21, G21

Suggested Citation

Johnson, Kathleen and Li, Geng, Are Adjustable-Rate Mortgage Borrowers Borrowing Constrained? (November 27, 2012). Real Estate Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2181556

Kathleen Johnson (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Geng Li

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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