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Why Are There No Fixed-Rate Mortgages in Taiwan

Why Are There No Fixed-Rate Mortgages in Taiwan. Yao-Min Chiang Department of Finance National Chengchi University August 28, 1998. Mortgage Instruments. Fixed-rate mortgages (FRMs) Adjustable-rate mortgages (ARMs) FRMs ARMs --------------------------------------------------

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Why Are There No Fixed-Rate Mortgages in Taiwan

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  1. Why Are There No Fixed-Rate Mortgages in Taiwan Yao-Min Chiang Department of Finance National Chengchi University August 28, 1998

  2. Mortgage Instruments • Fixed-rate mortgages (FRMs) • Adjustable-rate mortgages (ARMs) FRMs ARMs -------------------------------------------------- Borrowers bear Borrowers bear no interest rate risk all interest rate risk

  3. Lenders Use FRMs and ARMs to Reveal Borrower Mobility

  4. Borrowers Mortgage Choice Strategy • The objective of a borrower is to maximize hie/her utility.

  5. Pooling Equilibrium - All borrowers choose ARMs • the condition for G4 to be the equilibrium outcome is: • Given r0<E(r1), we have • Given r0>E(r1), we have

  6. Pooling Equilibrium - All borrowers choose ARMs • A quadratic utility function is used to run the numerical analysis. • Market Equilibrium

  7. Borrowers' choice behavior change due to a change in borrowers' initial income

  8. Borrowers' choice behavior change due to a change in borrowers' expectation about future income

  9. Borrowers' choice behavior change due to a change in the interest rate volatility

  10. Borrowers' choice behavior change due to a change in the initial interest rate

  11. Borrowers' choice behavior change due to a change in the expectation about future interest rates

  12. Borrowers' choice behavior change due to change in the ratio of expected future interest rate over expected future income

  13. Prime lending rate in Taiwan (1960-1997)

  14. Disposable income, housing price, and mortgage payment

  15. Conclusion • The tilt of income stream, plays a key role on borrower choice behavior. • The slope of the yield curve, is the key factor affecting mortgage choice. • Income and interest rates have an interaction on mortgage choice. • Downward sloping of the term structure of interest rates, low interest rate volatility, combined with the expectation of higher future payment-to-income ratio are the reason causing there are only ARMs in Taiwan's mortgage market.

  16. Pooling Equilibrium - All borrowers choose ARMs • the condition for G4 to be the equilibrium outcome is: • Given r0<E(r1), we have • Given r0>E(r1), we have

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