The Rise and Fall of the ARM: An Econometric Analysis of Mortgage Choice

Jan Brueckner and James R Follain

The Review of Economics and Statistics, 1988, vol. 70, issue 1, 93-102

Abstract: This paper estimates an empirical model of the choice between adjustable- and fixe d-rate mortgages using a large national database compiled by the Nat ional Association of Realtors. The explanatory variables in the probi t choice equation include borrower characteristics, regional dummies, the FRM rate, and the FRM-ARM rate differential. Since the intrerest rate on the mortgage not chosen is unobserved, this rate must be est imated in a way that eliminates selectivity bias. Simulation of the e stimated choice equation provides insight into the origin of the ARM revolution. Copyright 1988 by MIT Press.

Date: 1988
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