Optimal recursive refinancing and the valuation of mortgage-backed securities
By: Francis A. Longstaff.
Contributors: National Bureau of Economic Research.
Series: NBER working paper series ;; working paper 10422; Working paper series (National Bureau of Economic Research : Online) ;; working paper no. 10422.
Publisher: National Bureau of Economic Research
Published: 2004
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Subjects: Mortgage loans -- Refinancing.; Mortgage-backed securities.
Description: "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"--National Bureau of Economic Research web site.
Notes: Also available in print.
Includes bibliographical references.
Title from PDF file as viewed on 1/13/2005.
System requirements: Adobe Acrobat Reader.
Mode of access: World Wide Web.