Mortgagor behavior and prepayment models

Abstract

We measure the efficiency of mortgagors over time and the implications that this increased efficiency may have on prepayments. The problem was approached using two methodologies: a) econometric techniques to measure the refinancing incentive elasticity of prepayments and b) simulations based on a model of the refinancing incentive using system dynamics modeling. The results suggest that there is a structural change in the prepayment function used in the study over a period of 6 years. However, the results of the simulations model play down the effects that increased mortgagor efficiency may have on prepayments and reaffirms the effect of a sustained downward drift of the mortgage rate as the most important prepayment rates explanatory factor.