RESIDENTIAL MORTGAGE CHOICE - DOES THE SUPPLY-SIDE MATTER

Mortgage rate spreads from fixed-rate mortgages (FRM) to adjustable-ra te mortgages (ARM) clearly are an important factor driving the share o f ARM demand. Also important is the absolute level of mortgage rates r elative to historical levels which affect affordability and the percep tion that FRM rates are relatively attractive. As FRM rates go up affo rdability declines which shifts all but the very risk averse borrowers toward ARMs, which is precisely what is happening in the early part o f 1995. Beyond this traditional focus on demand factors influencing FR M versus ARM choice, this study includes an analysis of several supply side factors such as securitization of ARMs, and the possibility of s tructural shifts in the capital markets (separate regimes) over the st udy period. (C) 1995 Academic Press, Inc.