The Effect of Income and Collateral Constraints on Residential Mortgage Terminations

41 Pages Posted: 23 Jun 2000 Last revised: 3 Apr 2022

See all articles by Wayne R. Archer

Wayne R. Archer

University of Florida - Warrington College of Business Administration

David C. Ling

University of Florida - Warrington College of Business Administration

Gary A. McGill

University of Florida - Fisher School of Accounting

Date Written: July 1995

Abstract

The prepayment behavior of home mortgage borrowers has been widely observed to be inconsistent with behavior implied by classical option theory. A substantial literature has emerged examining the problem, focusing on the characteristics of the mortgage and on the historic path of interest rates in attempting to explain the anomaly. This paper offers contributions to the literature in three respects. First, it explores the influence of household level characteristics upon prepayment behavior, using both householder characteristics and collateral (house) value. Second, it empirically recognizes important interactions between the status of the prepayment option and the influence of income and collateral constraints upon prepayment behavior. Third, it uses a major source of data that has not previously been used in examining the prepayment anomaly: the American Housing Survey. Among the findings are the following: when the household is either collateral constrained or income constrained, or the option is likely to be out of the money, the influence of the option value upon prepayment behavior is less by half. When the status of the option and the influence of potential household constraints are more appropriately recognized, these factors account for nearly all explanatory power otherwise attributable to household demographic characteristics.

Suggested Citation

Archer, Wayne R. and Ling, David Curtis and McGill, Gary A., The Effect of Income and Collateral Constraints on Residential Mortgage Terminations (July 1995). NBER Working Paper No. w5180, Available at SSRN: https://ssrn.com/abstract=225243

Wayne R. Archer (Contact Author)

University of Florida - Warrington College of Business Administration ( email )

Gainesville, FL 32611
United States
352-392-1330 (Phone)
352-392-0301 (Fax)

David Curtis Ling

University of Florida - Warrington College of Business Administration ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
352-392-9307 (Phone)
352-392-0301 (Fax)

Gary A. McGill

University of Florida - Fisher School of Accounting ( email )

Warrington College of Business
PO Box 117166
Gainesville, FL 32611-7166
United States
352-273-0219 (Phone)
352-392-7962 (Fax)

HOME PAGE: http://warrington.ufl.edu/fsoa/faculty/facultyinfo.asp?WEBID=1132

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