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2 Housing Fin. Rev. 127 (1983)
The Economics of Mortgage Terminations: Implications for Mortgage Lenders and Mortgage Terms

handle is hein.journals/hsnfnrv2 and id is 129 raw text is: The Economics of Mortgage Terminations: Implications for Mortgage Lenders and Mortgage Terms by Patric H. Hendershott, Sheng Hu, and Kevin E. Villani* This paper begins with the development of models explaining the mortgage refinancing and assumption decisions of households. Having identified the economic variables influencing these decisions, we then simulate the models for different values to determine under what conditions households will refinance or assume in order to deduce the effect of a decline in mortgage rates on the asset portfolio yields of mortgage lending institutions. Finally, we draw some implica- tions of these results for the effect of the observed rise in interest- rate volatility-including the optimal terminations response of mortgage borrowers-on the terms of the mortgage contract and the returns to mortgage lenders on recently issued mortgage loans. I. Introduction For the past 50 years, mortgage debt has been repaid in a relatively predictable manner. Amortization occurred according to a prespecified schedule, and prepayments took the form of either a lump sum upon the sale of the house collateralizing the mortgage or occasional double * The Ohio State University, Purdue University, and the Federal Home Loan Mortgage Corporation, respectively. The views expressed in this paper are those of the authors, and are not intended to reflect the views or policy of the Federal Home Loan Bank Board. Editor's Note: This paper was written in the spring of 1982 and could be viewed, in part, as a forecast of the likely effect upon mortgage life of declines in interest rates that have occurred since then. © 1983 by Patric H. Hendershott, Sheng Hu, and Kevin E. Villani.

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