How to React to the Subprime Crisis? - The Impact of an Interest Rate Freeze on Residential Mortgage Backed

Julia Hein, Thomas Weber

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DOI: 10.4236/jssm.2009.24035                

Abstract

Several policy options have been discussed to mitigate the current subprime mortgage crisis. This paper analyses an interest rate freeze on adjustable rate mortgages as one possible reaction. In particular, the implications on Residential Mortgage Backed Securities (RMBS) are studied. We examine shifts in the underlying portfolio’s discounted cash flow distributions as well as changes in the payment profile of RMBS-tranches. We show that the positive effects of a rate freeze, e.g. less foreclosures and a stabilizing housing market, can outweigh the negative effect of lower interest income such that investors might be better off.

Keywords

Interest Rate Freeze, Subprime Mortgages, Residential Mortgage, Backed Securities (RMBS)

Conflicts of Interest

The authors declare no conflicts of interest.

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