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Mortgage rate spreads from fixed-rate mortgages (FRM) to adjustable-rate mortgages (ARM) clearly are an important factor driving the share of ARM demand. Also important is the absolute level of mortgage rates relative to historical levels which affect affordability and the perception that FRM rates are relatively attractive. As FRM rates go up affordability declines which shifts all but the very risk averse borrowers toward ARMs, which is precisely what is happening in the early part of 1995. Beyond this traditional focus on demand factors influencing FRM versus ARM choice, this study includes an analysis of several supply side factors such as securitization of ARMs, and the possibility of structural shifts in the capital markets (seperate regimes) over the study period. |
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