Conference Agenda

Mortgage structure matters not only for monetary policy transmission, but also for financial stability. Adjustable-rate mortgages (ARMs) expose households to rising rates, increasing default risk through higher payments, while fixed-rate mortgages (FRMs) protect households but potentially expose banks to greater interest rate risk. To evaluate these competing forces, we develop a quantitative model with flexible mortgage contracts, liquidity- and net worth-driven household default, and a banking sector with sticky deposits and occasionally binding constraints. We find financial stability risks exhibit a U-shaped relationship with mortgage fixation length. FRMs benefit from deposit rate stickiness, reducing volatility, whereas ARMs provide net worth hedging by concentrating defaults when intermediary net worth is high, thus lowering risk premia. An intermediate fixation length balances these effects, minimizing banking sector volatility and improving aggregate risk-sharing. Our model explains observed differences in delinquencies, house prices, and bank equity prices between ARM and FRM countries during 2022–2023, with implications for mortgage design, macroprudential regulation, and monetary policy.