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

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  • Joe P. Mattey
  • Nancy Wallace

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.

Suggested Citation

  • Joe P. Mattey & Nancy Wallace, 1998. "Housing prices and the (in)stability of mortgage prepayment models: evidence from California," Working Papers in Applied Economic Theory 98-05, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfap:98-05
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    Citations

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    Cited by:

    1. Downing, Chris & Stanton, Richard & Wallace, Nancy E., 2003. "An Empirical Test of a Two-Factor Mortgage Valuation Model: How Much Do House Prices Matter?," Research Program in Finance, Working Paper Series qt2qb613r5, Research Program in Finance, Institute for Business and Economic Research, UC Berkeley.
    2. Gary Engelhardt, 2001. "Nominal Loss Aversion, Housing Equity Constraints, and Household Mobility: Evidence from the United States," Center for Policy Research Working Papers 42, Center for Policy Research, Maxwell School, Syracuse University.
    3. Stuart A. Gabriel & Joe P. Mattey & William L. Wascher, 1999. "House price differentials and dynamics: evidence from the Los Angeles and San Francisco metropolitan areas," Economic Review, Federal Reserve Bank of San Francisco, pages 3-22.

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