The Journal of Real Estate Finance and Economics

, Volume 42, Issue 1, pp 51–67

An Analysis of Mortgage Termination Risks: A Shared Frailty Approach with MSA-Level Random Effects


  • James B. Kau
    • Department of Insurance, Legal Studies, and Real StateTerry College of Business, University of Georgia
  • Donald C. Keenan
    • Department of EconomicsTerry College of Business, University of Georgia
    • Discover Financial Services

DOI: 10.1007/s11146-009-9179-x

Cite this article as:
Kau, J.B., Keenan, D.C. & Li, X. J Real Estate Finan Econ (2011) 42: 51. doi:10.1007/s11146-009-9179-x


Investigating the residential mortgage defaults and prepayments has been the subject of research for the past three decades. The literature on mortgage default and prepayment is often used to inform credit risk policies and asset pricing strategies. This literature has evolved from the use of logistic regressions to the use of survival and frailty models that control for unobserved heterogeneity. In this paper, we apply a shared-frailty survival model to analyze the mortgage termination risks. In particular, we investigate whether mortgages originated in the same Metropolitan Statistical Area (MSA) share common unobserved factors and how these factors affect the mortgage termination risks. The paper demonstrates that MSA-level frailty, together with other risk factors, has significant effects on the probability of mortgage terminations risks.


Mortgage terminationMSAShared-frailty effect

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© Springer Science+Business Media, LLC 2009