Pricing Adjustable Rate Mortgages
34 Pages Posted: 25 Jun 2004 Last revised: 27 Mar 2021
Date Written: 1985
This paper provides a framework for pricing adjustable rate mortgages and summarizes some evidence on the prices (additions to the coupon rate) necessary to cover expected losses from binding of varios interest rate caps and from mortgage default and foreclosure. Both interst rate and default risk are shown to be heavily inluenced by the form of the mortgage instrument as well as the underlying drift and uncertainty in interest rates and house prices.
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