RUTHLESS PREPAYMENT - EVIDENCE FROM MULTIFAMILY MORTGAGES

Estimates of a prepayment function for multifamily mortgages are repor ted in this paper. These are among the first attempts to estimate such a function; most previous work along these lines focuses on single fa mily mortgages. A further distinguishing aspect of the paper is its at tempt to incorporate the impact of unobservable factors on the mortgag e refinancing decision. A variant of the maximum likelihood procedure first developed by Meyer [Ph.D. thesis, MIT (1987)] is employed. The r esults indicate an overall positive duration dependence for the condit ional prepayment rate. The estimated response of prepayments to a chan ge in the market rate of interest is significant with the expected sig n; it is also larger once the effect of unobserved heterogeneity is ta ken into account. Nonetheless, the magnitude of the response is substa ntially less than that predicted by the ruthless option pricing model. (C) 1997 Academic Press