The Mortgage Prepayment Decision: Are There Other Motivations Beyond Refinance and Move?

33 Pages Posted: 23 Oct 2019 Last revised: 24 Oct 2019

See all articles by Arden Hall

Arden Hall

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Ramain Quinn Maingi

New York University (NYU) - New York University

Date Written: 2019-10-21

Abstract

Borrowers terminate residential mortgages for a variety of reasons. Prepayments and defaults have always been distinguishable, and researchers have recently distinguished between prepayments involving a move and other prepayments. But these categories still combine distinct decisions. For example, a borrower may refinance to obtain a lower interest rate or to borrow a larger amount. By matching mortgage servicing and credit bureau records, we are able to distinguish among several motivations for prepayment: simple refinancing, cash-out refinancing, mortgage payoff, and move. Using multinomial logit to estimate a competing hazard model for these types of prepayments plus default, we demonstrate that these outcomes are distinct, with some outcomes showing quite different relationships to standard predictive variables, such as refinance incentive, credit score, and loan-to-value ratio, than in models that combine outcomes. The implication of these findings is that models that aggregate prepayment types do not adequately describe borrower motivations.

Keywords: mortgage finance, prepayment, default, nested logit model

JEL Classification: D12, R21

Suggested Citation

Hall, Arden and Maingi, Ramain Quinn, The Mortgage Prepayment Decision: Are There Other Motivations Beyond Refinance and Move? (2019-10-21). FRB of Philadelphia Working Paper No. 19-39. Available at SSRN: https://ssrn.com/abstract=3474363 or http://dx.doi.org/10.21799/frbp.wp.2019.39

Arden Hall (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Ramain Quinn Maingi

New York University (NYU) - New York University

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