Working Paper

Housing prices and the (in)stability of mortgage prepayment models: evidence from California

Abstract: Most empirical models of mortgage terminations emphasize refinancing incentives related to interest rate movements. We consider three sources of risk that lead to observed mortgage payment terminations: interest-rate related refinancing, default, and moving. We estimate models that identify the relative importance or regional risk factors leading to termination, using data on mortgage and housing market activity in fifteen California counties from 1992 through 1996. As expected, we find that the time-series dynamics of interest rates and house prices are important determinants of the exercise of the refinancing and default options across regional markets. We also find that mobility effects differ significantly across regions and have an appreciable effect on overall mortgage termination activity. Our results suggest that standard methods of mortgage-backed-securities valuation could be improved by explicitly modeling the dynamics of housing prices and by modeling how house prices affect mortgage terminations.

Keywords: Housing; Prices; Mortgages; California;

Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Working Papers in Applied Economic Theory

Publication Date: 1998

Number: 98-05