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Working Paper
Housing prices and the (in)stability of mortgage prepayment models: evidence from California
Most empirical models of mortgage terminations emphasize refinancing incentives related to interest rate movements. We consider three sources of risk that lead to observed mortgage payment terminations: interest-rate related refinancing, default, and moving. We estimate models that identify the relative importance or regional risk factors leading to termination, using data on mortgage and housing market activity in fifteen California counties from 1992 through 1996. As expected, we find that the time-series dynamics of interest rates and house prices are important determinants of the ...
Working Paper
Housing price cycles and prepayment rates of U.S. mortgage pools.
Empirical mortgage prepayment models generally have trouble explaining differences in mortgage prepayment speeds among pools with similar interest rates on the underlying mortgages. In this paper, we model some of the sources of termination heterogeneity across mortgage pools, particularly the role of regional variations in housing prices in generating atypical prepayment speeds. Using a sample of Freddie Mac mortgage pools from 1991-1998, we find evidence that differences in house price dynamics across regions are an important source of between-pool heterogeneity. This finding is then shown ...
Working Paper
Liquidity Crises in the Mortgage Market
Non-banks originated about half of all mortgages in 2016, and 75% of mortgages insured by the FHA or VA. Both shares are much higher than those observed at any point in the 2000s. We describe in this paper how non-bank mortgage companies are vulnerable to liquidity pressures in both their loan origination and servicing activities, and we document that this sector in aggregate appears to have minimal resources to bring to bear in a stress scenario. We show how the same liquidity issues unfolded during the financial crisis, leading to the failure of many non-bank companies, requests for ...
Journal Article
Hedonic-based price indexes for housing: theory, estimation, and index construction
Housing price indexes should not confound the effect of changes in quality with the effects of changing house prices. A recent nonparametric regression technique, loess, allows flexible estimation of the hedonic price function and centers the estimation at fixed points, such as the beginning or ending period housing characteristics. Indexes using these estimates are consistent with the requirements of Laspeyres and Paasche price indexes. The technique is used to obtain indexes for fifteen municipalities in Alameda County from 1970:Q1 through 1995:Q1. The nonparametric hedonic-based ...
Working Paper
An empirical test of a two-factor mortgage valuation model: how much do house prices matter?
Mortgage-backed securities, with their relative structural simplicity and their lack of recovery rate uncertainty if default occurs, are particularly suitable for developing and testing risky debt valuation models. In this paper, we develop a two-factor structural mortgage pricing model in which rational mortgage-holders endogenously choose when to prepay and default subject to i. explicit frictions (transaction costs) payable when terminating their mortgages, ii. exogenous background terminations, and iii. a credit-related impact of the loan-to-value ratio (LTV) on prepayment. We estimate ...
Working Paper
A real options approach to housing investment
In this paper, we study investments by existing homeowners to improve their homes. The value of a house is modeled as the expected net present value of a perpetual stream of service flows emanating from the attributes of the house. An important innovation in our model is that the set of house attributes evolves over time according to the investment decisions of the homeowner. The homeowner's decisions to invest in house attributes are modeled as real options. Our model of investment embeds a multi-factor term structure model and a general model of the evolution of service flows. We employ ...