The Mortgage Prepayment Decision: Are There Other Motivations Beyond Refinance and Move?

Arden Hall and Ramain Quinn Maingi

No 19-39, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: Borrowers terminate residential mortgages for a variety of reasons. Prepayments and defaults have always been distinguishable, and researchers have recently distinguished between prepayments involving a move and other prepayments. But these categories still combine distinct decisions. For example, a borrower may refinance to obtain a lower interest rate or to borrow a larger amount. By matching mortgage servicing and credit bureau records, we are able to distinguish among several motivations for prepayment: simple refinancing, cash-out refinancing, mortgage payoff, and move. Using multinomial logit to estimate a competing hazard model for these types of prepayments plus default, we demonstrate that these outcomes are distinct, with some outcomes showing quite different relationships to standard predictive variables, such as refinance incentive, credit score, and loan-to-value ratio, than in models that combine outcomes. The implication of these findings is that models that aggregate prepayment types do not adequately describe borrower motivations.

Keywords: mortgage finance; prepayment; default; nested logit model (search for similar items in EconPapers)
JEL-codes: D12 R21 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2019-10-21
New Economics Papers: this item is included in nep-cfn and nep-ure
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Citations: View citations in EconPapers (3)

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DOI: 10.21799/frbp.wp.2019.39

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