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A Dynamic Analysis of Fixed- and Adjustable-Rate Mortgage Terminations

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Abstract

This paper provides a side-by-side comparison of loan-level statistical models for fixed- and adjustable-rate mortgages. Multinomial logit models for quarterly conditional probabilities of default and prepayment are estimated. We find that the estimated impacts of embedded option values for prepayment and default are generally quite similar across both FRM and ARM loans, providing additional empirical support for the basic predictions of the options theory. We also find that differences in estimates of conditional probabilities of prepayment and default associated with mortgage age, origination period, original LTV, and relative loan size, indicate the continued significance of these other economic and demographic factors for empirical models of mortgage terminations.

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Authors and Affiliations

  1. Calhoun Consulting, Annadale, VA, 22003-4043

    Charles A. Calhoun

  2. University of Southern California, Los Angeles, CA, 90089-0626

    Yongheng Deng

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  1. Charles A. Calhoun
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  2. Yongheng Deng
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Calhoun, C.A., Deng, Y. A Dynamic Analysis of Fixed- and Adjustable-Rate Mortgage Terminations. The Journal of Real Estate Finance and Economics 24, 9–33 (2002). https://doi.org/10.1023/A:1013926103824

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  • DOI: https://doi.org/10.1023/A:1013926103824

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