Mastering the metropolis through research and thought leadership.
Working Papers

Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options

Working paper #322
Yongheng Deng, John M. Quigley and Robert Van Order

• We test the extent to which the option approach can explain default and prepayment behavior; evaluate the practical importance of modeling both options simultaneously; and model the unobserved heterogeneity of borrowers in the home mortgage market.
• Our results show that the option model, in its most straightforward version, does a good job of explaining default and prepayment; but it is not enough by itself.
• The simultaneity of the options is very important empirically in explaining behavior. Forecasts which ignore the interdependence between default and prepayment risks and which estimate these two risks separately lead to serious errors in estimating the default risk.
• The results also show that there exists significant heterogeneity among mortgage borrowers. Ignoring this heterogeneity results in serious errors in estimating the prepayment behavior of homeowners.
• Further, the results suggest that, holding other things constant, those who have chosen high initial LTV loans are more likely to exercise options in the mortgage market — prepayment as well as default. It appears that the initial LTV ratio, known at the time mortgages are issued, may well reflect investor preferences for risk in the market for mortgages on owner-occupied housing. Finally, unemployment and divorce rates have significant effects on default.

Download full paper · 3MB PDF

In This Section
Explore Topics

1010 Affordable Housing Amazon Amenitization Architecture Artificial Intelligence Asia Australia automation Autonomous Vehicles bonds Borrowing Constraints Brexit California Canada Capital Business China Co-Working Environment coastal markets cold storage Colombia Commercial Brokerage Commercial Real Estate commissions Congestion consumer bias covid-19 CRE credit card market Credit Default Swaps Credit Insurance Credit Risk Transfers Culture Data Analytics data centers Data Collection Technology Debt Market Demand Demographics Density Development Discrete Choice disruption Diversity drones e-Commerce Economic Corridors economic policy economics education election studies Equity Funds Equity Market Ethnic Factors Europe Fannie Mae financial asset management Foreclosures Foreign Policy France Freddie Mac general equilibrium Global global economy Global Financial Crisis Globalization great depression Great Recession healthy buildings Hedonic hospitality Housing & Residential housing boom Housing Disease housing prices Housing Supply Identity Income Inequality India inflation Inter-generational mobility interest rates Investing jobs labor market Lagging Regions land use regulation Language life sciences Macroeconomics malls Market Pricing megacities Microeconomics Migration Minimum Payments Mixed-Use Mobility moral hazard mortgage insurance mortgage market Mortgage Rates Mortgages Multi-family Nation Building Non-Traditional Mortgages Office Market office sector pension funds Placed Based Policies Political Risk Price Discovery Private Equity Business public health public policy Public Schools real estate brokerage Real Estate Investment Real Estate Investment Trusts Recession Rental Retail Retirement reverse mortgages Risk Adjustment risk management risk-shifting robotics single family housing Slums Sorting South America Spatial Regions spillover effect stimulus package Sub-Prime Mortgages Supply Chains Sustainability Technology telecommunications trade transportation unemployment United States Urban Urbanization Warehouse welfare work from home