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Prepayment Behavior of Dutch Mortgagors: An Empirical Analysis

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  • Erwin Charlier
  • Arjan van Bussel

Abstract

The suboptimal exercise of the prepayment option in a mortgage is relevant for mortgage pricing and the management of a mortgage portfolio. Construction of an accurate prepayment model requires quantification of driving factors such as seasoning, seasonality, refinance incentive and burnout. We focus on Dutch mortgages but also discuss the Dutch market in a European setting. Within the euro-denominated MBS market, the Dutch market is often referred to as the benchmark market. In our application we include typical Dutch market and contract characteristics such as the annual penalty-free prepayment of 10 to 20% of the original loan amount. We use loan-level historical data on mortgages originated between January 1989 and June 1999 to estimate separate models for two popular redemption types: savings mortgages and interest-only mortgages. In both models we allow for suboptimal prepayment behavior. The results clearly indicate that prepayment rates depend on interest rates and the age of the mortgage contract. Moreover, we find that burnout is an important element in describing the prepayment behavior of Dutch mortgagors. Copyright 2003 by the American Real Estate and Urban Economics Association

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Bibliographic Info

Article provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.

Volume (Year): 31 (2003)
Issue (Month): 2 (06)
Pages: 165-204

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Handle: RePEc:bla:reesec:v:31:y:2003:i:2:p:165-204

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References

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  1. Wayne R. Archer & David C. Ling, 1993. "Pricing Mortgage-Backed Securities: Integrating Optimal Call and Empirical Models of Prepayment," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 21(4), pages 373-404.
  2. Dunn, Kenneth B & McConnell, John J, 1981. "Valuation of GNMA Mortgage-Backed Securities," Journal of Finance, American Finance Association, vol. 36(3), pages 599-616, June.
  3. Stanton, Richard, 1995. "Rational Prepayment and the Valuation Mortgage-Backed Securities," Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 677-708.
  4. S. Michael Giliberto & David C. Ling, 1992. "An Empirical Investigation of the Contingent-Claims Approach to Pricing Residential Mortgage Debt," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 20(3), pages 393-426.
  5. Pan Kang & Stavros A. Zenios, 1992. "Complete Prepayment Models for Mortgage-Backed Securities," Management Science, INFORMS, vol. 38(11), pages 1665-1685, November.
  6. Michael J. Brennan & Eduardo S. Schwartz, 1985. "Determinants of GNMA Mortgage Prices," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 13(3), pages 209-228.
  7. Kau, James B, et al, 1992. "A Generalized Valuation Model for Fixed-Rate Residential Mortgages," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(3), pages 279-99, August.
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Cited by:
  1. Linda A. Toolsema & Jan P. A. M. Jacobs, 2007. "Why do prices rise faster than they fall? With an application to mortgage rates," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(7), pages 701-712.
  2. Alex Fayman & Ling T. He, 2011. "Prepayment risk and bank performance," Journal of Risk Finance, Emerald Group Publishing, vol. 11(1), pages 26-40, January.

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