Abstract

http://ssrn.com/abstract=1717072
 


 



Do Mortgage Points Signal Mobility of Transaction Costs? Evidence from Securitization


Brent W. Ambrose


Pennsylvania State University

Xun Bian


Longwood University

Michael LaCour-Little


California State University at Fullerton


46th Annual AREUEA Conference Paper

Abstract:     
To realize the benefit of the prepayment option embedded in a fixed-rate mortgage (FRM) contract, a borrower would have to make correct refinancing decisions. Hence, a FRM is never “maintenance-free”, such maintenance usually cost a substantial amount of time and effort. This paper asks the question: How do such costs influence borrower’s choice on mortgage points? We show that there exists a separating equilibrium such that borrowers with high costs pay more points to obtain a lower interest rate, and borrowers with low costs pay fewer points and receive a higher interest rate. In contrast, conventional mobility-based theory suggests that borrowers use discount points to signal mobility. It is unclear how lenders interpret the potential mixed screening role discount points. To separate the effect of transaction costs from that of mobility, we construct a transaction costs measure based on the “overvaluedness” of a loan. We find that overvalued loans and the ones with greater discount points are both more likely to be retained in the originator’s portfolio. This result suggests that securitization decisions are more likely made based on transaction costs rather than the expectations of mobility.

JEL Classification: L1

working papers series


Not Available For Download

Date posted: November 30, 2010  

Suggested Citation

Ambrose, Brent W. and Bian, Xun and LaCour-Little, Michael, Do Mortgage Points Signal Mobility of Transaction Costs? Evidence from Securitization. 46th Annual AREUEA Conference Paper. Available at SSRN: http://ssrn.com/abstract=1717072

Contact Information

Brent W. Ambrose (Contact Author)
Pennsylvania State University ( email )
University Park, PA 16802-3306
United States
814-867-0066 (Phone)
814-865-6284 (Fax)
Xun Bian
Longwood University ( email )
201 High Street
Farmville, VA 23901
United States
(434) 395-2231 (Phone)
(434) 395-2203 (Fax)
Michael LaCour-Little
California State University at Fullerton ( email )
5133 Mihaylo Hall
Fullerton, CA 92834-6848
United States
657-278-4014 (Phone)
657-278-2161 (Fax)
Feedback to SSRN


Paper statistics
Abstract Views: 165

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo6 in 0.265 seconds