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Valuing Agricultural Mortgage-Backed Securities

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  • Stokes, Jeffrey R.
  • Brinch, Brian M.

Abstract

A model to value Federal Agricultural Mortgage Corporation (Farmer Mac) agricultural mortgage-backed securities (AMBS) is developed and numerically solved. The results suggest prepayment penalties currently being used by Farmer Mac reduce yields on AMBS considerably. Even with prepayment penalties, it can be advantageous for profit maximizing mortgagors to optimally prepay or even default on agricultural mortgages. The model is used to quantify prepayment and default risk by valuing the embedded options in the mortgages. Monte Carlo simulation is also used to determine the probability of optimal prepayment given the term structure assumption used to develop the model.

Suggested Citation

  • Stokes, Jeffrey R. & Brinch, Brian M., 2001. "Valuing Agricultural Mortgage-Backed Securities," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 33(3), pages 493-511, December.
    • Handle: RePEc:cup:jagaec:v:33:y:2001:i:03:p:493-511_02
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    References listed on IDEAS

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    1. Boyle, Phelim & Broadie, Mark & Glasserman, Paul, 1997. "Monte Carlo methods for security pricing," Journal of Economic Dynamics and Control, Elsevier, vol. 21(8-9), pages 1267-1321, June.
    2. Yongheng Deng & John M. Quigley & Robert Van Order, 2000. "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Econometrica, Econometric Society, vol. 68(2), pages 275-308, March.
    3. George Lefcoe, 1999. "Mortgage Prepayment by Defeasance," Working Paper 8662, USC Lusk Center for Real Estate.
    4. 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.
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    Cited by:

    1. Dressler, Jonathan B. & Stokes, Jeffrey R., 2006. "Mortgage Termination at AgChoice Farm Credit," 2006 Agricultural and Rural Finance Markets in Transition, October 2-3, 2006, Washington, DC 133077, Regional Research Committee NC-1014: Agricultural and Rural Finance Markets in Transition.
    2. G. Rigatos & P. Siano, 2018. "Stabilization of Mortgage Price Dynamics Using a Boundary PDE Feedback Control Approach," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 16(1), pages 37-56, March.
    3. Katchova, Ani L. & Barry, Peter J., 2003. "Credit Risk Models: An Application to Agricultural Lending," 2003 Regional Committee NCT-194, October 6-7, 2003; Kansas City, Missouri 132519, Regional Research Committee NC-1014: Agricultural and Rural Finance Markets in Transition.
    4. Anders Grosen & Pernille Jessen & Thomas Kokholm, 2014. "An asset protection scheme for banks exposed to troubled loan portfolios," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 38(4), pages 568-588, October.
    5. Jonathan B. Dressler & Jeffrey R. Stokes, 2010. "Survival analysis and mortgage termination at AgChoice ACA," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 70(1), pages 21-36, May.

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