Empirical Evidence on Mortgage Choice as a Screening Mechanism for Default Risk

David Harrison and Thomas Noordewier

Journal of Housing Research, 2011, vol. 20, issue 1, 1-18

Abstract: This paper examines one of the most critical credit decisions made by consumers: selecting between a fixed-rate mortgage (FRM) and an adjustable-rate mortgage (ARM). This study employs a sample of 1,003 mortgage loans to empirically evaluate whether a borrower's choice between fixed and adjustable rate products is contingent upon both their transactions costs of default and default risk. The findings reveal that when a borrower's default costs are sufficiently small, high default risk borrowers disproportionately self-select into FRMs, while low default risk borrowers tend to selfselect into ARMs.

Date: 2011
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DOI: 10.1080/10835547.2011.12092030

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