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Commercial Mortgage Prepayments Under Heterogeneous Prepayment Penalty Structures

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Author Info

  • Qiang Fu

    (Fannie Mae, Washington DC 20016)

  • Michael LaCour-Little

    ()
    (Wells Fargo Home Mortgage & Washington University, Clayton, MO 63105)

  • Kerry D. Vandell

    ()
    (University of Wisconsin, Madison, WI 53706-1323)

Abstract

Much of the literature on pricing commercial mortgages and commercial mortgage-backed securities has assumed homogeneity in prepayment penalty structure. In this paper, we provide evidence that such an assumption is inappropriate and examine the effect of penalty structures observed in actual contracts. After conducting preliminary simulations, we present hazard models estimated from data on 1,165 multifamily mortgage loans 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. Our empirical results generally confirm the theoretical findings of Kelly and Slawson (2001).

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File URL: http://aux.zicklin.baruch.cuny.edu/jrer/papers/pdf/past/vol25n03/01.245_476.pdf
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Bibliographic Info

Article provided by American Real Estate Society in its journal Journal of Real Estate Research.

Volume (Year): 25 (2003)
Issue (Month): 3 ()
Pages: 245-476

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Handle: RePEc:jre:issued:v:25:n:3:2003:p:245-476

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Postal: American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323
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Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
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Web: http://aux.zicklin.baruch.cuny.edu/jrer/about/get.htm

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Cited by:
  1. Sebastian Barnes & Gregory Thwaites, 2005. "'Real-world' mortgages, consumption volatility and the low inflation environment," Bank of England working papers 273, Bank of England.
  2. Cynthia Holmes & Michael LaCour-Little, 2007. "Multifamily Mortgage Lending: A Comparison of the U.S. and Canada," International Real Estate Review, Asian Real Estate Society, vol. 10(1), pages 151-170.
  3. Brian A. Maris & William Segal, 2002. "Analysis of Yield Spreads on Commercial Mortgage-Backed Securities," Journal of Real Estate Research, American Real Estate Society, vol. 23(3), pages 235-252.

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