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Commercial Mortgage Prepayments Under Heterogeneous Prepayment Penalty Structures

Listed author(s):
  • 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)

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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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
Contact details of provider: 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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Order Information: Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
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