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Commercial Mortgage Prepayments Under Heterogeneous Prepayment Penalty Structures

32 Pages Posted: 5 Jan 2007  

Qiang Fu

Indiana University

Michael LaCour-Little

Federal National Mortgage Association (Fannie Mae); California State University at Fullerton

Kerry D. Vandell

University of California, Irvine - Paul Merage School of Business; University of California, Irvine School of Law

Abstract

Much of the literature on pricing commercial mortgages and commercial mortgage-backed securities has assumed homogeneity in prepayment penalty structure. This study provides evidence that such an assumption is inappropriate and examines the effect of penalty structures observed in actual contracts. After conducting preliminary simulations, hazard models estimated from data on 1,165 multifamily mortgage loans are presented to show how empirical prepayment rates vary with alternative penalty structures. While yield maintenance and lockout provisions are relatively more effective than fixed or step down structures in reducing or postponing prepayment, none completely eliminates the risk. The empirical results generally confirm the theoretical findings of Kelly and Slawson (2001).

Keywords: commercial mortgage, mortgage-backed security, prepayment penalty

JEL Classification: G21, K11, K12, R20, R11-15, R21, R31-34, R38

Suggested Citation

Fu, Qiang and LaCour-Little, Michael and Vandell, Kerry D., Commercial Mortgage Prepayments Under Heterogeneous Prepayment Penalty Structures. Journal of Real Estate Research Vol. 25, No. 3, 2003. Available at SSRN: https://ssrn.com/abstract=955030

Qiang Fu

Indiana University ( email )

107 S Indiana Ave
100 South Woodlawn
Bloomington, IN 47405
United States

Michael LaCour-Little (Contact Author)

Federal National Mortgage Association (Fannie Mae) ( email )

3900 Wisconsin Avenue, NW
Washington, DC 20016-2892
United States
202-752-3318 (Phone)

California State University at Fullerton ( email )

5133 Mihaylo Hall
Fullerton, CA 92834-6848
United States
657-278-4014 (Phone)
657-278-2161 (Fax)

Kerry D. Vandell

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

University of California, Irvine School of Law ( email )

401 E. Peltason Dr.
Ste. 1000
Irvine, CA 92697-1000
United States

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