Tuesday, March 19th @ 11:00-12:30 PM, 648 Evans Hall and Zoom
This paper investigates the increase in adjustable-rate mortgage (ARM) credit volume shares in the government-sponsored enterprise(GSE) commercial mortgage-backed securities(CMBS) market since the global financial crisis. We find evidence of borrowers exploiting prepayment options embedded in ARM contracts during low policy rate periods, which coincide with upside collateral value cycle. Moreover, we find that ARM borrowers, who are landlords, pass-through interest rate risks to renters during federal funds rate hike periods while they do not pass-through declines in interest rates. Through a stylized two-period model, we show that the two options triggered in two different monetary policy regimes can affect mortgage choice among borrowers in the GSE CMBS market.