Competing Risks of Mortgage Termination: Who Refinances, Who Moves, and Who Defaults?

Abstract

Why, when, and who terminates their mortgages? The primary reasons for mortgage termination are refinancing, selling of the property, and default. This paper is the first to explicitly model these competing risks within a unified conceptual framework and provide a link between theoretical value maximizing mortgage termination models and empirical estimation. I find, for instance, that the refinancing risk is highly sensitive to interest rate changes and other variables capturing the value of the mortgage. On the other hand, the necessity to relocate, either through sale of the property or default, is sensitive to the local economic conditions but largely independent of the value of the mortgage.

Keywords: prepayment, refinancing, default, household mobility, mortgage-backed securities