A SIMPLE PREPAYMENT MODEL OF COMMERCIAL MORTGAGES

Prepayment behavior of single family mortgages has been intensively re searched over the past 10 years. This knowledge is essential for valui ng the uncertain cash flows of publicly traded mortgage-based securiti es. A similar need in the much smaller commercial mortgage market rema ins unfilled. Commercial data to support empirical research are genera lly unavailable, while results from the single family market are not r eadily transferable since commercial contracts are different, often in cluding a lockout or yield maintenance provision, and commercial borro wers are believed to behave more ''ruthlessly'' than single family bor rowers. This paper reports prepayment data and presents the results fr om a simple prepayment model, using a sample of 7,800 multifamily mort gages owned by Freddie Mac and originated over the period 1984 to 1990 . The empirically estimated model follows the current literature in re lying primarily on the spread between the book value and the market va lue of the mortgage to measure the prepayment incentive. The Wall Stre et characterization of commercial mortgages being ''fast prepays'' is assessed by comparing these model results with a Foster and Van Order single family specification. (C) 1997 Academic Press.