The Economics of Mortgage Terminations: Implications for Mortgage Lenders and Mortgage Terms

The paper begins with the development of models explaining the mortgage refinancing and assumption decisions of households.Having identified the economic variables influencing these decisions, we then simulate the models for different values to determine under what conditions households will refinance or assume.Finally, we draw some implications of these results for:(1) the impact of a decline in mortgage rates on the asset portfolio yields of mortgage lending institutions and (2) the effect of the observed rise in interest rate volatility, including the optimal terminations response of mortgage borrowers, on the terms of the mortgage contract and the returns to mortgage lenders on recently issued mortgage loans.