Commercial Mortgage Prepayments Under Heterogeneous Prepayment Penalty Structures
California State University at Fullerton
Kerry D. Vandell
University of California, Irvine - Paul Merage School of Business
Journal of Real Estate Research Vol. 25, No. 3, 2003
Much of the literature on pricing commercial mortgages and commercial mortgage-backed securities has assumed homogeneity in prepayment penalty structure. This study provides evidence that such an assumption is inappropriate and examines the effect of penalty structures observed in actual contracts. After conducting preliminary simulations, hazard models estimated from data on 1,165 multifamily mortgage loans are presented to show how empirical prepayment rates vary with alternative penalty structures. While yield maintenance and lockout provisions are relatively more effective than fixed or step down structures in reducing or postponing prepayment, none completely eliminates the risk. The empirical results generally confirm the theoretical findings of Kelly and Slawson (2001).
Number of Pages in PDF File: 32
Keywords: commercial mortgage, mortgage-backed security, prepayment penalty
JEL Classification: G21, K11, K12, R20, R11-15, R21, R31-34, R38
Date posted: January 5, 2007
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