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Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options


  • Yongheng Deng
  • John M. Quigley
  • Robert Van Order


Option theory predicts that mortgage prepayment or default will be exercised by homeowners if the call or put option is sufficiently "in the money." This analysis: tests the extent to which the option approach explains default and prepayment behavior; evaluates the importance of modeling both options simultaneously; and models the unobserved heterogeneity of mortgage holders. The paper presents a unified model of the competing risks of mortgage termination, considering the hazards as dependent competing risks, estimated jointly. It also accounts for the unobserved heterogeneity among borrowers, and estimates the unobserved heterogeneity simultaneously with the prepayment and default functions.
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  • Yongheng Deng & John M. Quigley & Robert Van Order, "undated". "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Zell/Lurie Center Working Papers 322, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
  • Handle: RePEc:wop:pennzl:322

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    References listed on IDEAS

    1. James M. Poterba, 1983. "Tax Subsidies to Owner-occupied Housing: An Asset Market Approach," Working papers 339, Massachusetts Institute of Technology (MIT), Department of Economics.
    2. King, Mervyn A., 1980. "An econometric model of tenure choice and demand for housing as a joint decision," Journal of Public Economics, Elsevier, vol. 14(2), pages 137-159, October.
    3. Patric H. Hendershott & Joel Slemrod, 1982. "Taxes and the User Cost of Capital for Owner-Occupied Housing," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 10(4), pages 375-393.
    4. Mervyn A. King, 1980. "An econometric model of tenure choice and demand for housing as a joint decision," NBER Chapters,in: Econometric Studies in Public Finance, pages 137-159 National Bureau of Economic Research, Inc.
    5. Martin Feldstein, 1987. "The Effects of Taxation on Capital Accumulation," NBER Books, National Bureau of Economic Research, Inc, number feld87-1, January.
    6. Bruce, Donald & Holtz-Eakin, Douglas, 1999. "Fundamental Tax Reform and Residential Housing," Journal of Housing Economics, Elsevier, vol. 8(4), pages 249-271, December.
    7. Deng, Yongheng & Quigley, John M. & Van Order, Robert & Mac, Freddie, 1996. "Mortgage default and low downpayment loans: The costs of public subsidy," Regional Science and Urban Economics, Elsevier, vol. 26(3-4), pages 263-285, June.
    8. Edwin S. Mills, 1987. "Dividing up the investment pie: have we overinvested in housing?," Business Review, Federal Reserve Bank of Philadelphia, issue Mar, pages 13-23.
    9. Richard K. Green & Patric H. Hendershott & Dennis R. Capozza, 1996. "Taxes, Mortgage Borrowing and House Prices," Wisconsin-Madison CULER working papers 96-06, University of Wisconsin Center for Urban Land Economic Research.
    10. Joseph Tracy & Henry Schneider & Sewin Chan, 1999. "Are stocks overtaking real estate in household portfolios?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 5(Apr).
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