Pricing Mortgages: an Interpretation of the Models and Results

65 Pages Posted: 19 Jul 2004 Last revised: 12 Sep 2008

See all articles by Patric H. Hendershott

Patric H. Hendershott

University of Aberdeen - Centre for Property Research; National Bureau of Economic Research (NBER)

Robert Van Order

Federal Home Loan Mortgage Corporation (FHLMC) - Housing Economics and Financial Research

Date Written: June 1987

Abstract

Mortgages, like all debt securities, can be viewed as risk-free assets plus or minus contingent claims that can be usefully viewed as options. The most important options are: prepayment, which is a call option giving the borrower the right to buy back the mortgage at par, and default, which is a put option giving the borrower the right to sell the house in exchange for the mortgage. This paper reviews and interprets the large and growing body of literature that applies recent results of option pricing models to mortgages. We also provide a critique of the models and suggest directions for future research.

Suggested Citation

Hendershott, Patric H. and Van Order, Robert, Pricing Mortgages: an Interpretation of the Models and Results (June 1987). NBER Working Paper No. w2290, Available at SSRN: https://ssrn.com/abstract=347060

Patric H. Hendershott (Contact Author)

University of Aberdeen - Centre for Property Research ( email )

Aberdeen AB24 2UF
Scotland

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Robert Van Order

Federal Home Loan Mortgage Corporation (FHLMC) - Housing Economics and Financial Research ( email )

Mailstop 484
8200 Jones Branch Drive
McLean, VA 22102
United States
703-903-2390 (Phone)
703-903-2445 (Fax)

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