Mortgage Prepayments and an Analysis of the Wharton Prepayment Model

Abstract

Predicting the behavior of homeowners in paying or prepaying their mortgages is a key feature of both pricing and portfolio management models. All major players in the market of mortgage-backed securities have to deal with the idiosyncracies of mortgage owners. A variety of prepayment models are currently in routine use by Wall Street firms, insurance and pension fund companies, investment advisory firms, and mortgage agencies. However, most of these models are proprietary, and the analytics underlying them are carefully guarded. We evaluate empirically a model developed at the Wharton School, intending to validate a model developed in academia—whose details are available in the open literature [Kang and Zenios 1992]—by using standard industrial tests.

Prepayment Behavior of Dutch Mortgagors: An Empirical Analysis

“…For example, Kang and Zenios (1992) use several hundred thousand mortgage-backed securities over an eight-year period to estimate an empirical prepayment model. Golub and Pohlman (1994) include over 28 million historical prepayment rates to calibrate the Wharton prepayment model. 1 However, the aggregated pool-level data smooths out the individual loan characteristics that are behind the pool averages.…”

Quantifying the Refinance Incentive and Losses from Prepayments

“…Most of the literature on prepayments of mortgage-backed securities is based on U.S. pools of data. Examples include Abrahams [1997], Clapp, Harding, and LaCour-Little [2000], Colin-Dufresne and Harding [1999], Golub and Pohlman [1994], Hayre (1999), Hayre and Arvind [1995], Hayre, Chaudhary, and Young [2000], Huang et al [1999], Jegadeesh and Ju [2000], Kang and Zenios [1992], Patruno [1994], Richard and Roll [1989], and Singh and McConnell [1996]. For applications to Dutch mortgages, see Bussel [1998] and Bussel and de Jong [1999].…”