Adjustable Rate Mortgages: Market Trends, Characteristics and Prepayment Modeling

Bill Burns, Ph.D.

The adjustable rate mortgage market has been evolving rapidly in conjunction with the needs of homebuyers in the last several years. In this white paper, market trends and borrower behavior are examined in search of an intuitive understanding of the forces governing prepayment characteristics for adjustable rate mortgages. Using this intuition, the elements of the new BondEdge-Hybrid ARM Prepayment model are discussed, as well as its impact on interest rate risk measures.