Housing Price Cycles and Prepayment Rates of U.S. Mortgage Pools

Posted: 30 Jun 2002

See all articles by Joe Mattey

Joe Mattey

affiliation not provided to SSRN

Nancy Wallace

University of California, Berkeley - Real Estate Group

Abstract

Empirical mortgage prepayment models generally have trouble explaining differences in mortgage prepayment speeds among pools with similar interest rates on the underlying mortgages. In this paper, we model some of the sources of termination heterogeneity across mortgage pools, particularly the role of regional variations in housing prices in generating atypical prepayment speeds. Using a sample of Freddie Mac mortgage pools from 1991-1998, we compare two classes of empirical models: a rational option pricing model using a backward solving pricing algorithm and an empirical hazard model. In both empirical estimation strategies, we find evidence that differences in house price dynamics across regions are an important source of between-pool heterogeneity. This finding is then shown to be robust to alternative ways of parameterizing pool heterogeneity in mortgage termination models.

Keywords: mortgage-backed securities (MBS), mortgage prepayment, mortgage default, housing prices

Suggested Citation

Mattey, Joe and Wallace, Nancy E., Housing Price Cycles and Prepayment Rates of U.S. Mortgage Pools. Journal of Real Estate Finance & Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=302384

Joe Mattey

affiliation not provided to SSRN

Nancy E. Wallace (Contact Author)

University of California, Berkeley - Real Estate Group ( email )

Berkeley, CA 94720-1900
United States

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