A Farewell to ARMs or Ever Changing Market Segments?

  • Bing Chen
  • Frank P. Stafford


The mortgage market has given rise to a changing and diverse set of borrowers actively using ARMs. Data from the Panel Study of Income Dynamics (PSID) for 2007 and 2013–2015 are used to study borrowing decisions. One view is that an ARM should be offered and taken by those better able to respond to an upward reset. Yet favorable economic conditions induce a demand for mortgages, including by higher risk borrowers, and for these households transactions occur at higher rates, often as ARMs, especially as of 2007. Panel analysis confirms some response to the spread but also to changing demand for mortgages in the shorter run. During the boom, the use of ARMs as a tool for ‘affordability’ led to actual transaction rates exceeding those for fixed rate mortgages. Analysis confirms substantial payment difficulties. Yet, analysis of mortgage transitions, 2007–13, establishes that the ‘affordability’ component to ARM, though less significant, still was present. ARMs were often taken by minorities and those with less education and with family income under $60,000 per year.


Consumption Liquidity Constraints Housing Demand Mortgages 

JEL Classification

G1 E21 R21 



We thank Paula Fomby, Charles Brown and other seminar participants at the Michigan Survey Research Center’s research seminar as well as Gavin Wood, Trevor Kollmann and other seminar participants at the Royal Melbourne Institute of Technology. The research reported herein was in part performed pursuant to a grant from the U. S. Social Security Administration (SSA) funded as part of the Retirement Research Consortium. The opinions and conclusions expressed are solely those of the authors and do not represent the opinions or policy of SSA or any agency of the federal government. The collection of data used in this study was partly supported by the National Institutes of Health under grant number R01 HD069609 and the National Science Foundation under award number 1157698.

Glossary of Terms

Demographic and Education

male_head_ 07 (13): 1–0 if head of family is male

age_head_07 (13) < =34: 1–0 if head of family is under age 35

34 < age_head_07 (13) < =49: 1–0 if head of family is age 35–49

49 < age_head_07 (13) < =64: 1–0 if head of family is age 50–64

(age 65 and older excluded)

edu_head_07 (13) = 12: 1–0 if head is high school graduate

12 < edu_head_07 (13) < =16: 1–0 if head has some college or a college graduate

edu_head_07 (13) > 16: 1–0 if head has graduate education

(less than high school excluded)

African Americans_07 (13): 1–0 if head is African American (Census definition)

employed_head_07 (13): 1–0 if head employed as of date of the survey

employed_wife_07 (13): 1–0 if wife employed as of date of the survey

no_wife_07 (13): 1–0 if not married or cohabiting

Income and Asset

Income head 2007 ($1000,000)

Income head 2008 ($1000,000)

Income wife 2007 ($1000,000)

Income wife 2008 ($1000,000)

value of checking and saving 2007 > $40,000: 1–0 if liquidity value is greater than $40,000

Labor Market and Demographic

10,000 < value of checking and saving 2007 < =$40,000: 1–0 if liquidity value is above $10,000 and less than or equal to $40,000

value of checking and saving 2007 > $40,000: 1–0 if liquidity value is greater than $40,000

Income and Wealth

60 K < total_fam_income_07 (13) < =120 K: 1–0 if family income of 2006 (2012) is above $60,000 and less than or equals to $120,000

total_fam_income_07 (13) > 120 K: 1–0 if family income of 2006 (2012) is above $120,000

10 K < wealth_without_home_equity_07 (13) < =130 K: 1–0 if wealth less home equity is above $10,000 and less than or equal to $130,000

wealth_without_home_equity_07 (13) >130 K: 1–0 if wealth less home equity is above $130,000

constrain_07 (13): 1–0 if head age is less than 35 and head education is more than college and wealth less home equity is less than or equal to $10,000

Interview Date 2009

Interviewed before April 2009: 1–0 indicator

Interviewed between June and August 2009: 1–0 indicator

Interviewed after August 2009: 1–0 indicator

(April and May excluded)

Labor Market and Demographic

Laid off head 2009: 1–0 if head is laid off at date of the survey

Unemployed head 2009: 1–0 if head is unemployed at date of the survey

Disabled head 2009: 1–0 if head is disabled at date of the survey

Laid off wife 2009: 1–0 if wife is laid off at date of the survey

Unemployed wife 2009: 1–0 if wife is unemployed at date of the survey

Disabled wife 2009: 1–0 if wife is disabled at date of the survey

Mortgage Variables

year_took_mrtg1_07 (13): the year the first mortgage was taken

took_mrtg1_btw (2004–2006): 1–0 if took in the period 2004–2006

fix_rate-adj_rate of mortgages: prevailing market rate differences of 30 year fixed rate less 1-year Mortgage Bankers adjustable rate in year mortgage taken

ARM rate: 1-year ARM rate Mortgage Bankers data by year

Region and Urban Status

Northeast_07 (13): 1–0 if Census Region is Northeast

North Central_07 (13): 1–0 if Census Region is North Central

South_07 (13): 1–0 if Census Region is South

state_07 (13) in (AZ, CA, FL, NV) and urban_07 (13) = 1: 1–0 if in one of these states and in central metropolitan counties of population of 1000,000 or more

state_07 (13) in (AZ, CA, FL, NV) and urban_07 (13) = 2: 1–0 if in one of these states and in fringe metropolitan counties of population of 1000,000 or more

plan_move_07 (13): 1–0 if plans to change residence in the next few years


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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Shenzhen Audencia Business School - Shenzhen UniversityGuangdongChina
  2. 2.Department of Economics and Institute for Social ResearchUniversity of MichiganAnn ArborUSA

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