ALTERNATIVE MORTGAGE INSTRUMENTS, QUALIFICATION CONSTRAINTS AND THE DEMAND FOR HOUSING - AN EMPIRICAL-ANALYSIS

Government-guaranteed mortgage loans (GFRMs) and adjustable-rate mortg ages (ARMs) were introduced to make payment to income (PTI) and loan-t o-value (LTV) qualification conventions less restrictive. This paper a nalyzes the effect of GFRMs and ARMs on the demand for housing. Using a large national data set for the 1988 to 1989 period, we employ a two -stage procedure to estimate housing demand. In the first stage, a mul tinomial logit model estimates the probability of choosing an FRM, ARM or GFRM. Predicted values from the logit are used to construct user c osts and estimate housing demand. Using the model estimates, we simula te demand under four different mortgage availability regimes: FRM, FRM and GFRM, FRM and ARM and all three. These simulations indicate that GFRMs, by relaxing LTV constraints, increase housing demand by approxi mately 6.2% relative to the FRM regime; the addition of ARMs, by relax ing both PTI and LTV constraints, raises demand by an additional 6%, f or a total of 12.2% with inclusion of all alternatives.