Some Effects of Variable Rate Mortgages on Mortgage Markets and Housing. (RE-ANNOUNCEMENT of PB85-126787-see notes field for explanation)

摘要

This paper presents a simple model that permits analysis of the consequences of removing the prohibition on issuing variable rate mortgages (VRM's). The study analyzes lending and interest-rate levels with and without a prohibition on VRM's. The paper's purpose is to illustrate the usefulness of starting with first principles (utility maximization) and using them as a basis for analyzing a situation in which a regulatory change makes past parameters (of demand and supply curves) obsolete. The model implies that regardless of the extent of households' reluctance to accept risk, the introduction of VRM's will raise the level of housing, and they may also lower the average yields on both VRM's and level-payment mortgages, which would cause even very risk-averse household to benefit; however, while VRM's improve the housing sector's ability to cope with interest rate volatility, they open it up to soe other changes. Further, the results may be affected by whether or not deposit-rate ceilings are maintained. Removing the prohibition of VRM's opens up the housing sector and, in effect, makes mortgages closer substitutes for other assets, particularly short-term debt. This makes it easier for thrift institutions to compete for funds and thus encourages more housing. Whether or not this increase (given tax preferences for housing) is efficient is another matter. Eight footnotes and four references are provided.