Mortgage Prepayment and Default Decisions: A Poisson Regression Approach

Eduardo S. Schwartz and Walter N. Torous

Real Estate Economics, 1993, vol. 21, issue 4, 431-449

Abstract: This paper uses an extensive and geographically dispersed sample of single‐family fixed rate mortgages to assess the prepayment and default behavior of individual homeowners. We make use of Poisson regression to efficiently estimate the parameters of a proportional hazards model for prepayment and default decisions. Poisson regression for grouped survival data has several advantages over partial likelihood methods. First, when dealing with time‐dependent covar‐iates, it is considerably more efficient in terms of computations. Second, it is possible to estimate full‐hazard models which include, for example, functions of time as well as multiple time scales (i.e., age of the loan and calendar time), in a much more straightforward manner than partial likelihood methods for un‐grouped data. Third, Poisson regression can be used to estimate non‐proportional hazards models such as additive excess risk specifications. Taken together, our data and estimation methodology allow us to obtain a better understanding of the economic factors underlying prepayment and default decisions.

Date: 1993
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