Commercial Mortgage Prepayments Under Heterogeneous Prepayment Penalty Structures

Qiang Fu, Michael LaCour-Little () and Kerry D. Vandell ()
Additional contact information
Qiang Fu: Fannie Mae, Washington DC 20016
Michael LaCour-Little: Wells Fargo Home Mortgage & Washington University, Clayton, MO 63105
Kerry D. Vandell: University of Wisconsin, Madison, WI 53706-1323

Journal of Real Estate Research, 2003, vol. 25, issue 3, pages 245-476

Abstract: Much of the literature on pricing commercial mortgages and commercial mortgage-backed securities has assumed homogeneity in prepayment penalty structure. In this paper, we provide evidence that such an assumption is inappropriate and examine the effect of penalty structures observed in actual contracts. After conducting preliminary simulations, we present hazard models estimated from data on 1,165 multifamily mortgage loans to show how empirical prepayment rates vary with alternative penalty structures. While yield maintenance and lockout provisions are relatively more effective than fixed or step down structures in reducing or postponing prepayment, none completely eliminates the risk. Our empirical results generally confirm the theoretical findings of Kelly and Slawson (2001).

JEL-codes: L85 (search for similar items in EconPapers)
Date: 2003

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