Pricing Efficiency in the Mortgage Market

Traditionally, the presence of serial correlation has been presumed to indicate an inefficient market for financial assets. As Latham [15] discusses, while the absence of serial correlation implies market efficiency, its mere presence does not imply inefficiency. Rather, market efficiency is a characteristic of security pricing. This study investigates pricing efficiency in the mortgage market. Using mortgage loan quotations for 343 institutions over a 71-week period, the empirical findings show that a wide variety of mortgage contracts are efficiently priced.     

Taxes, Points and Rationality in the Mortgage Market

This paper addresses the issue of why discount points exist in the mortgage market. In the process of resolving these questions, a number of insights into the mortgage market are achieved. An important principle is that changes in loan structure due to points, prepayments or other deviations in the typical mortgage have no impact on the competitive rate of return. Thus, the essential role of points is not to raise the effective rate of return nor are they the purchase price a risk-averter desires for an option to prepay. Instead it is taxes that play the critical role.     

Efficiency in the Mortgage Market: The Borrower's Perspective

This paper uses mortgage history data from the Federal Home Loan Mortgage Corporation to analyze the prepayment behavior of homeowners and to test whether borrowers exercise their prepayment options in a manner consistent with contingent claims models. A variety of hazard models are estimated from individual data on more than 6000 mortgages issued during the 1976–1980 period. In these models, it is clear that the extent to which the prepayment option is "in the money" has a strong effect on behavior. However, it is less clear that the option is exercised quite as ruthlessly as the theory predicts.     

房地产抵押贷款二级市场初探

目前我国房地产抵押贷款金融机构中存在着抵押贷款资金缺乏，抵押风险大的两大问题，针对这一问题笔认为尽快建立房地产抵押贷款二级市场是解决上述两个问题的关键，本论述了二级市场在解决上述两个问题中所发挥的作用，以及建立房地产抵押贷款二级市场需要的条件。     

关于房贷利率上调对房地产市场影响的几点分析

本文在2006年4月28日央行出台新的住房贷款利率政策以控制目前房地产市场过热现象的背景下,对房地产政策加以分析。通过对以往政策的回顾和新出台的以金融手段抑制需求的政策的分析,得出长期控制房地产市场过热问题的关键是控制供给政策和控制需求政策的配套运用。     

关矛房贷利率上调对房地产市场影响的几点分析

本文在2006年4月28日央行出台新的住房贷款利率政策以控制目前房地产市场过热现象的背景下，对房地产政策加以分析。通过对以往政策的回顾和新出台的以金融手段抑制需求的政策的分析，得出长期控制房地产市场过热问题的关键是控制供给政策和控制需求政策的配套运用。     

Regressive Interest Rate Expectations and Mortgage Instrument Choice in the United Kingdom Housing Market

The paper considers the choice of mortgage instrument when the rate of interest is fixed for a short duration, with reversion to a variable (bullet) rate mortgage contract. The research is the first direct test for regressive interest rate expectations using United Kingdom data while testing for wealth and portfolio effects. The econometric modeling uses a variety of nonparametric and parametric techniques to control for classification error in the dependent variable. There is evidence that households adopt regressive interest rate expectations. The lack of statistical significance of wealth and portfolio effects confirms the short run cash flow perspective of United Kingdom mortgage choices.     

An Arbitrage-Free Estimate of Prepayment Option Prices in Fixed-Rate GNMA Mortgage-Backed Securities

In an efficient market, the no-arbitrage condition implies that the price difference between any two assets must be the market value of all differences in their cash flows. We use this logic to deduce the price of the prepayment option embedded in fixed-rate Government National Mortgage Association (GNMA) mortgage-backed securities. The option price equals the difference between an observed GNMA price and the cost of a synthetic, nonprepayable GNMA constructed from the least expensive portfolio of Treasury securities that exactly replicates the promised GNMA cash flow stream, assuming prepayment is precluded. We regress the option prices on variables found significant in previous prepayment studies, finding that five key regressors explain more than 90% of the prepayment option value in pooled time-series cross-sectional analysis. We also show that the time value of the prepayment option calculated by our method displays a pattern similar to that produced by the Black-Scholes (1973) option pricing model. An additional empirical result is the existence of negative option prices and negative time value of the option prices. We attribute these to the fact that homeowners sometimes exercise their prepayment options when they are out-of-the-money, and to refinancing transaction costs. Our method is independent of assumptions regarding interest rate processes and the homeowner's prepayment behavior, and it provides a benchmark for testing theoretical prepayment models.     

Privatized Default Risk and Real Estate Recessions: The U.K. Mortgage Market

A mortgage pricing model is developed when a borrower goes through a series of distress states, including delinquency, long-term nonpayment and ultimate default. These steps are sequential, and depend on prices and alternatives faced by the borrower. The multistate default model is applied to the mortgage market in the United Kingdom. As a byproduct, a pricing structure for the U.K. endowment mortgage, which combines a good and a life insurance policy, is developed. Income and liquidity constraints are shown to affect the decision to keep a mortgage current in different states of distress. Solvent borrowers may thus keep their mortgages current, even when equity is negative.     

Adjustable and Fixed Rate Mortgage Termination, Option Values and Local Market Conditions: An Empirical Analysis

This paper analyzes the probabilities of prepayment or default for Fixed Rate Mortgages (FRMs) and Adjustable Rate Mortgages (ARMs). Using data from the period 1985–1992, the analysis indicates that the likelihood of prepayment of thirty year FRMs was determined primarily by house price appreciation and personal income growth and the likelihood of prepayment of fifteen year FRMs was determined primarily by interest rate changes. ARMs were prepaid less frequently than FRMs, were less likely to be prepaid when interest rates declined and defaulted more often than FRMs. The analysis provides evidence that ARM holders are less mobile than FRM holders.     

The Demand and Supply of Mortgage Funds and Mortgage Loan Terms

The supply of and demand for residential mortgages has been the subject of much discussion in the literature. Many of these studies have used single equation, partial adjustment models with the price specified as the contract rate. In this study, two of the assumptions that underlie these previous studies are tested empirically. First, the proper specification of the price of mortgage funds is tested by using both the contract rate alone and all of the terms of the mortgage as the price. Second, the speed of adjustment in the mortgage market is examined by estimating the model in both the instantaneous adjustment and partial adjustment forms. Both of these tests are carried out using a simultaneous equation rather than a single equation model. The empirical results indicate that the contract rate along with the loan initiation fees, the loan-to-value ratio and the maturity is the better specification of price and that the partial adjustment model performs better than the instantaneous model in the mortgage market.     

Modelling Mortgage Terminations in Turbulent Times

Techniques used to predict mortgage defaults during a relatively stable period proved less successful during the turbulent financial cycle of the early 1980s. An alternative specification of the relationship between defaults, homeowner equity, and interest-rate movements better captures the effect of interest rates on default probability. Results confirm the powerful effect of equity on mortgage defaults and the strong, but asymmetric, influence of interest rates on both defaults and prepayments. The new specification allows direct measurement of the interest-rate effect on defaults, distinguishing the effect when rates rise or fall.     

Risk and the Home Equity Conversion Mortgage

This article analyzes the risks involved with reverse mortgage insurance and explains the pricing model developed for the Home Equity Conversion Mortgage (HECM) demonstration. The paper demonstrates how borrower longevity, interest rates and property value changes all affect pricing, and why the HECM model focuses on property value as the primary source of uncertainty. It goes on to explain why a random walk specification was chosen to forecast property values, and how the principal limit factors, which determine cash payments to borrowers in the HECM program, are calculated.     

Mortgage Choice†

Mortgage choice refers to a set of problems faced by a homeowner that includes the choice of a loan-to-value ratio, the refinancing and default decisions, and the choice of mortgage instrument. This paper reviews much of the literature that has been written on the topic. It begins with a listing of the major stylized facts the literature seeks to explain. Models used to explain mortgage choice are categorized and discussed. It is argued that the relatively simple certainty model that incorporates liquidity constraints seems capable of explaining some of the stylized facts, but is unable to explain some others. The paper concludes with a discussion of three policy questions that require a better understanding of mortgage choice before they can be answered. The paper is based upon the author's Presidential Address to the American Real Estate and Urban Economics Association, which was delivered in Atlanta, Georgia on December 29, 1989.     

Regional Economic Stability and Mortgage Default Risk in the Netherlands

This paper investigates the relationship between regional economic diversification and stability, and residential mortgage default risk in the Netherlands. To describe and measure regional economic diversity and stability, methods from both the regional economics and the industrial economics literature are used. All measures are based on regional employment characteristics. Mortgage default rates were obtained from a database of the population of insured mortgage defaults in the Netherlands from 1983 through 1990. To test the relationship between the measures and mortgage default risk, cross sectional Seemingly Unrelated Regression was used. The paper concludes that the employed measures explain regional mortgage default rates to a significant extent, and that stability measures outperform diversity measures.     

Preliminary Evaluation of the HECM Reverse Mortgage Program

This paper describes and evaluates the Home Equity Conversion Mortgage (HECM) insurance demonstration, designed to encourage the development of private reverse mortgage programs by insuring lenders against the risks associated with new mortgage lending programs and with reverse mortgages in particular. The paper evaluates demand for the program by analyzing the attributes of participating borrowers, their properties and the types of payment options chosen. It also presents several observations regarding participation by the financial community in the HECM demonstration, required counseling and legal and regulatory issues that may hamper the growth and development of reverse mortgage programs in general.
The findings suggest strong demand for reverse mortgages among "house-rich, cash-poor" elderly homeowners, either to supplement inadequate current incomes or to provide a reserve against unexpected lump-sum expenses. The flexible design of the HECM program addresses a wide variety of borrower financial needs, even though it imposes higher costs on lenders and servicers. The continued growth of the program, however, is hindered by a shortage of qualified housing counselors in some areas, as well as by a variety of legal and regulatory barriers.     

Mortgage Borrower Repayment Behavior: A Microeconomic Analysis with Canadian Adjustable Rate Mortgage Data

In this paper we estimate a model of mortgage borrower behavior using micro-level data on Canadian borrowers with rollover mortgages—a form of adjustable-rate mortgage. Our results suggest that the probability of default rises with a decrease in housing equity and an increase in the mortgage contract rate; however the size of these changes is relatively small. They also show that partial prepayment is sensitive to fluctuations in the rates of return from investing in housing versus other assets. For the United States experience, our results suggest that, relative to fixed-rate mortgage borrowers, adjustable-rate mortgage borrowers are more likely to default and less likely to prepay.     

Mortgage Refinancing with Asymmetric Information

Information asymmetry exists between the lender and the borrower regarding the holding period of the mortgaged real estate; the lender does not know how long the borrower plans to own the house. This information asymmetry allows the cost of obtaining a mortgage to deviate from its value to the borrower. As a result, the exercise price of the option to refinance becomes the cost to the borrower of obtaining a new mortgage instead of the outstanding balance of the existing mortgage as used in previous models. The option to refinance is a sequential option; after the borrower refinances, a new option is obtained to refinance again in the future. A mortgage refinancing model is developed taking information asymmetry and sequential refinancing into account. The model is used to solve for (1) the value to the borrower of a callable mortgage and (2) the minimum interest rate differential between the contract rate of the existing mortgage and the market interest rate needed to justify refinancing.     

Relocation Opportunities and Mortgage Default

This paper presents a theoretical model of residential mortgage default when borrowers face beneficial as well as costly relocation opportunities. It amplifies and extends previous work by providing explicit conditions leading to default. The model also establishes when a borrower's relocation decision and default decision are dependent and when they are not.
A central result is that there is a range of book equity wherein the decision to default is not determined solely by the current level of equity or the borrower's ability to continue the mortgage payments. Rather, various costs and benefits, both tangible and intangible, enter into the decision. Specific conditions are identified that lead to relocation without default, default and relocation, and no default or relocation. The effects of changes in the variables upon default probability are presented.
Assuming that the borrower does not wish to retain ownership in the property, the model also predicts whether an individual borrower will choose prepayment or default when a relocation is made. The choice depends on the value of the relocation opportunity faced by the borrower, as well as financial variables such as house value, mortgage balance, and transaction costs. This finding suggests that existing empirical analyses of default may have omitted explanatory variables.