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A Generalized Valuation Model for Fixed-Rate Residential Mortgages

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Author Info
Kau, James B, et al

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Abstract

This paper uses option pricing techniques to rationally price mortgage instruments subject to both default and prepayment risk. Attention is given to terminations due to purely financial consideration of the mortgage contract itself, as well as to personally induced terminations. Explicit inclusion of default in the mortgage valuation procedure also permits the valuation of insurance against such default. Qualitatively, it is found that default differs significantly in the behavior from either prepayment or nonfinancial termination. Quantitatively, however, there is significant substitution between prepayment and default, so that the addition of a default feature to the contract has only a modest impact on mortgage values, unless there is substantial price volatility in the housing market or a high loan-to-value ratio. Copyright 1992 by Ohio State University Press.

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File URL: http://links.jstor.org/sici?sici=0022-2879%28199208%2924%3A3%3C279%3AAGVMFF%3E2.0.CO%3B2-K&origin=bc
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Publisher Info
Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 24 (1992)
Issue (Month): 3 (August)
Pages: 279-99
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:mcb:jmoncb:v:24:y:1992:i:3:p:279-99

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Michael LaCour-Little & Gregory H. Chun, 1999. "Third Party Originators and Mortgage Prepayment Risk: An Agency Problem?," Journal of Real Estate Research, American Real Estate Society, vol. 17(1), pages 55-70. [Downloadable!]
  2. Amir E. Khandani & Andrew W. Lo & Robert C. Merton, 2009. "Systemic Risk and the Refinancing Ratchet Effect," NBER Working Papers 15362, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. James Kau & Luke Peters, 2005. "The Effect of Mortgage Price and Default Risk on Mortgage Spreads," The Journal of Real Estate Finance and Economics, Springer, vol. 30(3), pages 285-295, April. [Downloadable!] (restricted)
  4. David Feldman & Shulamith Gross, 2005. "Mortgage Default: Classification Trees Analysis," The Journal of Real Estate Finance and Economics, Springer, vol. 30(4), pages 369-396, June. [Downloadable!] (restricted)
  5. Chris Downing & Richard Stanton & Nancy Wallace, 2003. "An empirical test of a two-factor mortgage valuation model: how much do house prices matter?," Finance and Economics Discussion Series 2003-42, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  6. Ashok Bardhan & Raša Karapandža & Branko Urošević, 2006. "Valuing Mortgage Insurance Contracts in Emerging Market Economies," The Journal of Real Estate Finance and Economics, Springer, vol. 32(1), pages 9-20, February. [Downloadable!] (restricted)
  7. Susanto Basu & Robert Inklaar & J. Christina Wang, 2008. "The Value of Risk: Measuring the Service Output of U.S. Commercial Banks," NBER Working Papers 14615, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  8. Willemann, Søren, 2005. "GSE Funding Advantages and Mortgagor Benefits: Answers from Asset Pricing," Finance Research Group Working Papers F-2005-04, University of Aarhus, Aarhus School of Business, Department of Business Studies. [Downloadable!]
  9. Palmroos, Peter, 2009. "Effects of unobserved defaults on correlation between probability of default and loss given default on mortgage loans," Research Discussion Papers 3/2009, Bank of Finland. [Downloadable!]
  10. Barry Dennis & Chionglong Kuo & Tyler Yang, 1997. "Rationales of Mortgage Insurance Premium Structures," Journal of Real Estate Research, American Real Estate Society, vol. 14(3), pages 359-378. [Downloadable!]
  11. James Kau & Donald Keenan, 1999. "Catastrophic Default and Credit Risk for Lending Institutions," Journal of Financial Services Research, Springer, vol. 15(2), pages 87-102, March. [Downloadable!] (restricted)
  12. Paul S. Calem & Michael LaCour-Little, 2001. "Risk-based capital requirements for mortgage loans," Finance and Economics Discussion Series 2001-60, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  13. Sanders, Anthony B. & Slawson, V. Carlos, Jr., 2005. "Shared Appreciation Mortgages: Lessons from the UK," Working Paper Series 2005-16, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
  14. Ren-Raw Chen & Hsien-Hsing Liao & Tyler Yang, 2008. "Market Risk of Mortgage-Backed Securities with Consistent Measures," The Journal of Real Estate Finance and Economics, Springer, vol. 36(1), pages 121-140, January. [Downloadable!] (restricted)
  15. Michael LaCour-Little & Michael Marschoun & Clark L. Maxam, 2002. "Improving Parametric Mortgage Prepayment Models with Non-parametric Kernel Regression," Journal of Real Estate Research, American Real Estate Society, vol. 24(3), pages 299-328. [Downloadable!]
  16. Chris Downing & Richard Stanton & Nancy Wallace, 2003. "An Empirical Test of a Two-Factor Mortgage Valuation Model: How Much Do House Prices Matter?," Research Program in Finance, Working Paper Series 1011, Research Program in Finance, Institute for Business and Economic Research, UC Berkeley. [Downloadable!]
  17. Charlier, E. & Bussel, A. van, 2001. "Prepayment behaviour of Dutch mortgagors : an empirical analysis," Discussion Paper 64, Tilburg University, Center for Economic Research. [Downloadable!]
    Other versions:
  18. Valentina Hartarska & Claudio Gonzalez-Vega, 2005. "Credit Counseling and Mortgage Termination by Low-Income Households," The Journal of Real Estate Finance and Economics, Springer, vol. 30(3), pages 227-243, April. [Downloadable!] (restricted)
  19. Nicholas Sharp & David Newton & Peter Duck, 2008. "An Improved Fixed-Rate Mortgage Valuation Methodology with Interacting Prepayment and Default Options," The Journal of Real Estate Finance and Economics, Springer, vol. 36(3), pages 307-342, April. [Downloadable!] (restricted)
  20. Mikkel Svenstrup & Soren Willemann, 2006. "Reforming Housing Finance - Perspectives from Denmark," Journal of Real Estate Research, American Real Estate Society, vol. 28(2), pages 105-130. [Downloadable!]
  21. Toru Sugimura, 2004. "Valuation of Residential Mortgage-Backed Securities with Default Risk Using an Intensity-Based Approach," Asia-Pacific Financial Markets, Springer, vol. 11(2), pages 185-214, June. [Downloadable!] (restricted)
  22. Claudio Gonzalez-Vega & Valentina Hartarska, 2005. "Credit counseling and mortgage termination by low-income households," Proceedings, Federal Reserve Bank of Chicago, issue Apr. [Downloadable!]
  23. Isil Erol & Kanak Patel, 2004. "Housing Policy and Mortgage Finance in Turkey During the Late 1990s Inflationary Period," International Real Estate Review, Asian Real Estate Society, vol. 7(1), pages 98-120. [Downloadable!]
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