Demographic Versus Option-Driven Mortgage Terminations

Abstract

The study departs from most previous work by examining mortgage termination behavior at the household level and by examining the totality of terminations, due to both call behavior and mobility behavior. It exploits information in the American Housing Surveys (AHS) to examine national cross-sections of 6,119 and 4,160 owner households. While accounting for the influence of interest rate movements in motivating termination -- the call option influence, the study uses two sequential panels of the AHS to investigate the modifying effect of household financial, demographic and location characteristics upon termination behavior. Although we find the effect of the call option (systematic effect) to be highly significant in explaining terminations in a declining interest rate environment, we also find that demographic and locational effects (diversifiable) are potentially at least as significant. This result suggests that incomplete diversification over the non-systematic factors of demography and location could cause significant variation in termination rates.

JEL Classification: R20