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Pricing Mortgages: An Interpretation of the Models and Results

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Author Info
Patric H. Hendershott
Robert Van Order

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Abstract

Mortgages, like all debt securities, can be viewed as risk-free assets plus or minus contingent claims that can be usefully viewed as options. The most important options are: prepayment, which is a call option giving the borrower the right to buy back the mortgage at par, and default, which is a put option giving the borrower the right to sell the house in exchange for the mortgage. This paper reviews and interprets the large and growing body of literature that applies recent results of option pricing models to mortgages. We also provide a critique of the models and suggest directions for future research.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2290.

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Date of creation: Feb 1988
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Handle: RePEc:nbr:nberwo:2290

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Richard, Scott F., 1978. "An arbitrage model of the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 6(1), pages 33-57, March. [Downloadable!] (restricted)
  2. Brown, Stephen J & Dybvig, Philip H, 1986. " The Empirical Implications of the Cox, Ingersoll, Ross Theory of the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 41(3), pages 617-30, July. [Downloadable!] (restricted)
  3. Brennan, Michael J. & Schwartz, Eduardo S., 1977. "Savings bonds, retractable bonds and callable bonds," Journal of Financial Economics, Elsevier, vol. 5(1), pages 67-88, August. [Downloadable!] (restricted)
  4. Green, Jerry & Shoven, John B, 1986. "The Effects of Interest Rates on Mortgage Prepayments," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(1), pages 41-59, February. [Downloadable!] (restricted)
  5. Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring. [Downloadable!] (restricted)
  6. Masulis, Ronald W., 1982. "Government intervention in the mortgage market : A study of anti-redlining regulations," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 191-213. [Downloadable!] (restricted)
  7. Campbell, Tim S & Dietrich, J Kimball, 1983. " The Determinants of Default on Insured Conventional Residential Mortgage Loans," Journal of Finance, American Finance Association, vol. 38(5), pages 1569-81, December. [Downloadable!] (restricted)
  8. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June. [Downloadable!] (restricted)
  9. Dothan, L. Uri, 1978. "On the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 6(1), pages 59-69, March. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  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. John M. Harris, Jr. & G. Stacy Sirmans, 1987. "Discount Points, Effective Yields and Mortgage Prepayments," Journal of Real Estate Research, American Real Estate Society, vol. 2(2), pages 97-104. [Downloadable!]
  3. Jill Wetmore & Chiaku Ndu, 2006. "Mortgage Refinancing Activity: An Explanation [1990–2001]," The Journal of Real Estate Finance and Economics, Springer, vol. 33(1), pages 75-86, August. [Downloadable!] (restricted)
  4. Sumit Agarwal & John C. Driscoll & David Laibson, 2007. "Optimal Mortgage Refinancing: A Closed Form Solution," NBER Working Papers 13487, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Patric H. Hendershott, . "Uses of Equilibrium Models in Real Estate Research," Research in Financial Economics 9612, Ohio State University. [Downloadable!]
  6. Terrence M. Clauretie & Mel Jameson, 1995. "Residential Loan Renegotiation: Theory and Evidence," Journal of Real Estate Research, American Real Estate Society, vol. 10(2), pages 153-162. [Downloadable!]
  7. Yongheng Deng & John M. Quigley & Robert Van Order, 1995. "Mortgage Default and Low Downpayment Loans: The Costs of Public Subsidy," NBER Working Papers 5184, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  8. Robert Eisenbeis, 2000. "History of the Journal of Financial Services Research," Journal of Financial Services Research, Springer, vol. 18(2), pages 103-107, December. [Downloadable!] (restricted)
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