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Here's an interesting paper on housing & boom-bust cycles, specifically looking at the use of Fixed Rate Mortgages (FRM) vs. Adjustable Rate Mortgages (ARM):
*** C-D Moderators -- the abstract below is included below by permission
Abstract
This paper analyzes how arrangements in the in the mortgage market impact the dynamics of housing (boom-bust episodes) and the economy using a structural equilibrium model with incomplete markets and endogenous adjustment costs. In response to mortgage rates and credit conditions, the model can generate movements in house prices, residential investment, and homeownership consistent with the U.S. housing boom-bust.
The propagation to the macroeconomy is asymmetric with much higher consumption sensitivity during the bust than the boom due to the endogenous fragility caused by mortgage debt. Mortgages with adjustable-rate increase the sensitivity of house prices to credit conditions relative to an economy with fixed-rate loans without refinancing. Macro prudential policies can mitigate fragility by reducing the magnitude of house price movements without curtailing homeownership.
Here's an interesting paper on housing & boom-bust cycles, specifically looking at the use of Fixed Rate Mortgages (FRM) vs. Adjustable Rate Mortgages (ARM):
*** C-D Moderators -- the abstract below is included below by permission
Abstract
This paper analyzes how arrangements in the in the mortgage market impact the dynamics of housing (boom-bust episodes) and the economy using a structural equilibrium model with incomplete markets and endogenous adjustment costs. In response to mortgage rates and credit conditions, the model can generate movements in house prices, residential investment, and homeownership consistent with the U.S. housing boom-bust.
The propagation to the macroeconomy is asymmetric with much higher consumption sensitivity during the bust than the boom due to the endogenous fragility caused by mortgage debt. Mortgages with adjustable-rate increase the sensitivity of house prices to credit conditions relative to an economy with fixed-rate loans without refinancing. Macro prudential policies can mitigate fragility by reducing the magnitude of house price movements without curtailing homeownership.
I know someone who's job it was to predict risk on pools of mortgages for a top 3 lender. Billions of dollars in loans that their models said would be o.k. - failed. Think the Big Short. These type of papers are why that situation happened -- because there are always variables not seen by some "academic" removed from the process. You don't need 44 pages to know that variable rate loans are more sensitive to market dislocations than others.
Don't forget the modern, sophisticated lenders who used ethnic, racial, and geographic rationalizations to fudge longstanding debt to income guidelines. After all, a medical worker in CA can surely live with debt at 70% of income 'cause everything is more expensive on the west coast.
Yes, there was plenty of fraud leading up to the bubble, and the regulators were asleep at their desks. But I found the article interesting nonetheless.
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