EconPapers    
Economics at your fingertips  
 

Optimal Recursive Refinancing and the Valuation of Mortgage-Backed Securities

Francis Longstaff

No 10422, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the optimal recursive refinancing problem where a borrower minimizes his lifetime mortgage costs by repeatedly refinancing when rates drop sufficiently. Key factors affecting the optimal decision are the cost of refinancing and the possibility that the mortgagor may have to refinance at a premium rate because of his credit. The optimal recursive strategy often results in prepayment being delayed significantly relative to traditional models. Furthermore, mortgage values can exceed par by much more than the cost of refinancing. Applying the recursive model to an extensive sample of mortgage-backed security prices, we find that the implied credit spreads that match these prices closely parallel borrowers' actual spreads at the origination of the mortgage. These results suggest that optimal recursive models may provide a promising alternative to the reduced-form prepayment models widely used in practice.

JEL-codes: G1 (search for similar items in EconPapers)
Date: 2004-04
Note: CF AP
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (5) Track citations by RSS feed

Published as Longstaff, Francis A. "Borrower Credit And The Valuation Of Mortgage-Backed Securities," Real Estate Economics, 2005, v33(4,Winter), 619-661.

Downloads: (external link)
http://www.nber.org/papers/w10422.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:10422

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w10422

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Series data maintained by ().

 
Page updated 2017-09-29
Handle: RePEc:nbr:nberwo:10422