The Behavioral Law and Economics of Fixed-Rate Mortgages (and Other Just-So Stories)

By Todd Zywicki on November 3, 2014

This was originally published on The Volokh Conspiracy at the Washington Post on November 3, 2014:

I have posted a new article on SSRN, The Behavioral Law and Economics of Fixed-Rate Mortgages (and Other Just-So Stories). This is the manuscript version“the article is available in the most recent issue of theSupreme Court Economic Review (Volume 21) in a symposium on Behavioral Law and Economics which features contributions by Tom Ulen, Fred McChesney, Ronald Mann, and many others. The papers came out of a conference hosted by the George Mason Law and Economics Center a few years ago.

Here’s the Abstract to the article:

A major cause of the recent financial crisis was the traditional American mortgage, which is distinctive for the following features: it is a thirty-year, self-amortizing loan with an unlimited right to prepay. The United States is unique in the world for standardizing on a mortgage product with these features. Yet not only have a majority of the foreclosures that occurred during the financial crisis been fixed-rate mortgages, the fixed-interest-rate characteristics have undermined efforts by the Federal Reserve and government to assist recovery of the housing market. Moreover, the long fixed-rate term and ability to refinance are highly expensive and suboptimal features for many consumers. Nevertheless, many consumers persist in purchasing this mortgage. Drawing on the methodology of behavioral law and economics, this article provides rationalizations for how behavioral law and economics can explain the persistence of a product that is so harmful to many consumers and to the economy at large. The article then draws conclusions about what this analysis means for the behavioral law and economics research program generally and for the use of behavioral law and economics in government policymaking.