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.
Cite this paper
nullJ. Hein and T. Weber, "How to React to the Subprime Crisis? - The Impact of an Interest Rate Freeze on Residential Mortgage Backed," Journal of Service Science and Management, Vol. 2 No. 4, 2009, pp. 289-304. doi: 10.4236/jssm.2009.24035.
 International Monetary Fund, Global Financial Stability Report, Washington DC, April 2008.
Keys, J. Benjamin, T. Mukherjee, A. Seru, and V. Vig, “Did securitization lead to lax screening? Evidence from Subprime Loans,” Working Paper, 2008.
Cagan, L. Christopher, “Mortgage payment reset: The issue and impact,” First American CoreLogic, March 19, 2007.
Ashcraft, B. Adam, and T. Schuermann, “Understanding the securitization of subprime mortgage credit,” Federal Reserve Bank of New York Staff Reports, No. 318, 2008.
 Chomsisengphet, Souphala and A. Pennington-Cross, “The evolution of the subprime mortgage market,” Federal Reserve Bank of St. Louis Review, Vol. 88, No. 1, pp. 31–56, 2006.
Kiff, John and P. Mills, “Money for nothing and checks for free: Recent developments in U.S. subprime mortgage markets,” Working Paper, International Monetary Fund, 07/188, 2007.
G. Dell’ Ariccia, D. Igan, and L. Laeven, “Credit booms and lending standards: Evidence from the subprime mortgage market,” Working Paper, 2008.
Demyanyk, Yuliya and Otto Van Hemert, “Understanding the subprime mortgage crisis,” Working Paper FRB St. Louis and NYU Stern, 2007.
 Gerardi, Kristofer, A. H. Shapiro and P. S. Willen: “Subprime outcomes: Risky mortgages, homeownership experiences, and foreclosures,” Working Paper Federal Reserve Bank of Boston, No. 07–15, 2007.
Pennington-Cross, Anthony “Credit history and the per-formance of prime and nonprime mortgages,” Journal of Real Estate Research, Vol. 27, No. 3, pp. 279–301, 2003.
 Englund, Peter and Y. M. Ioannidis, “House Price Dynamics: An International Empirical Perspective,” Journal of Housing Economics, Vol. 6, pp. 119–136, 1997.
 Franke, Günter and Krahnen, Jan Pieter: “Default risk sharing between banks and markets: The contribution of collateralized loan obligations,” in: The Risks of Financial Institutions, NBER book edited by Mark Carey and Rene Stulz, University of Chicago Press, pp. 603–631. 2006.
Hull, John, and A. White: “Valuation of a CDO and an nth to Default CDS without monte carlo simulation,” Journal of Derivatives, Vol. 12, No. 2, pp. 8–23, 2004.
 Duffie, Darrell, and N. Garleanu: “Risk and valuation of collateralized debt obligations,” Financial Analysts Journal (January/February), pp. 41–59, 2001.
 Longstaff, A. Francis, and A. Rajan, “An empirical analysis of the pricing of collateralized debt obligations,” Journal of Finance, Vol. 63, No. 2, pp. 529–563, 2008.
Pennington-Cross, Anthony, “The value of foreclosed property,” Journal of Real Estate Research, Vol. 28, No. 2, pp. 193–214, 2004.