DEMOGRAPHIC VERSUS OPTION-DRIVEN MORTGAGE TERMINATIONS

This study examines mortgage termination behavior at the household lev el, including fixed-rate mortgage terminations due to call, default, a nd mobility behavior. It exploits information in the American Housing Survey to examine national cross sections of 6119 and 4160 owner house holds. While accounting for the influence of interest rate movements i n motivating termination-the call option influence-the study uses two sequential panels to investigate the modifying effect of household fin ancial, demographic, and location characteristics upon termination beh avior. Although we find the effect of the call option (systematic effe ct) to be highly significant in explaining terminations in a declining interest rate environment, we also find that demographic and location al effects (diversifiable) are potentially at least as significant. Th is result suggests that incomplete diversification over the nonsystema tic factors of demography and location could cause significant variati on in termination rates. (C) 1997 Academic Press.