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

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

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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: https://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)
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