1. Why Are There No Fixed-Rate Mortgages in Taiwan
Yao-Min Chiang
Department of Finance
National Chengchi University
August 28, 1998

2. Mortgage Instruments Fixed-rate mortgages (FRMs)
Adjustable-rate mortgages (ARMs)
FRMs ARMs
Borrowers bear Borrowers bear
no interest rate risk all interest rate risk

3. Lenders Use FRMs and ARMs to Reveal Borrower Mobility

4. Borrowers Mortgage Choice Strategy
The objective of a borrower is to maximize hie/her utility.

5. Pooling Equilibrium - All borrowers choose ARMs
the condition for G4 to be the equilibrium outcome is:
Given r0<E(r1), we have
Given r0>E(r1), we have

6. Pooling Equilibrium - All borrowers choose ARMs
A quadratic utility function is used to run the numerical analysis.
Market Equilibrium

7. Borrowers' choice behavior change due to a change in borrowers' initial income

8. Borrowers' choice behavior change due to a change in borrowers' expectation about future income

9. Borrowers' choice behavior change due to a change in the interest rate volatility

10. Borrowers' choice behavior change due to a change in the initial interest rate

11. Borrowers' choice behavior change due to a change in the expectation about future interest rates

12. Borrowers' choice behavior change due to change in the ratio of expected future interest rate over expected future income

13. Prime lending rate in Taiwan (1960-1997)

14. Disposable income, housing price, and mortgage payment

15. Conclusion
The tilt of income stream, plays a key role on borrower choice behavior.
The slope of the yield curve, is the key factor affecting mortgage choice.
Income and interest rates have an interaction on mortgage choice.
Downward sloping of the term structure of interest rates, low interest rate volatility, combined with the expectation of higher future payment-to-income ratio are the reason causing there are only ARMs in Taiwan's mortgage market.

16. Pooling Equilibrium - All borrowers choose ARMs
the condition for G4 to be the equilibrium outcome is:
Given r0<E(r1), we have
Given r0>E(r1), we have