Burnout from pools to loans: Modeling refinancing prepayments as a self-selection process

Jumwu Gan

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper we present compelling evidence from a detailed analysis of historical prepayment data to demonstrate that a mortgage cohort remembers the level of the previous mortgage rate troughs experienced by the cohort. This is a general property, observed ubiquitously, that inescapably leads to refinancing models with a continuous distribution of refinancing incentive thresholds (elbows). We present such a new refinancing model, derived from the first principle, based on a single assumption that each loan has an incentive threshold above which its borrower will refinance. In this model, the refinancing prepayment of a cohort is a dynamic self-selection process that evolves by itself according to the encountered mortgage rate environment with the cohort concurrently acquiring its memory along the way.

Keywords: Mortgage; Prepayment; refinance; burnout; MBS; duration; convexity (search for similar items in EconPapers)
JEL-codes: C01 C51 C53 G10 G12 G19 (search for similar items in EconPapers)
Date: 2009-05-31
New Economics Papers: this item is included in nep-ure
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:15596

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