THE PROBABILITY OF FIXED-RATE AND ADJUSTABLE-RATE MORTGAGE TERMINATION

This article analyzes mortgage terminations using a national individua l loan data set for the 1986-1992 period. The standard option-choice-t heoretic framework is supplemented with variables to proxy for non-opt ion-related termination determinants. Separate multinominal legit mode ls are estimated for three mortgage types: 30-year FRMs, 15-year FRMs, and 30-year ARMs. The results indicate substantial differences in the response of the mortgage types to variables included in the model. FR M15 prepayments are the most responsive to prepayment option values; F RM30 prepayments are less responsive to option values and are dirven b y local area housing market and economic conditions; ARM prepayment ra tes are higher but default rates are lower relative to the FRMs. A not eworthy finding is that teaser discounts reduce the likelihood of ARM defaults.