Modeling mortgage prepayment without any regards for the interest rate development seems overly simplified in my opinion.. People will prepay their liabilities if they can get financing at a lower interest rate, as the spread between the interest rate of their mortgage and the possible refinancing rate increases more people will start exercising this option. Theoretically the option is an american type option and should be exercised if its in the money. The hardest question is human behaivor.
@ImoIamAGod Yes, of course I fully agree: homeowner owns (pays) for an embedded call option. I just meant to here start by introducing "traditional" metrics. They are not used, in isolation, by any modern practitioners who (to my knowledge) all use models that capture, to various degrees, the "incentives" of homeowners including refinancing as function of--but not only a function of--interest rate levels.
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nice advice
CostaRicaMarketing 4 months ago
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ImoIamAGod 1 year ago
Modeling mortgage prepayment without any regards for the interest rate development seems overly simplified in my opinion.. People will prepay their liabilities if they can get financing at a lower interest rate, as the spread between the interest rate of their mortgage and the possible refinancing rate increases more people will start exercising this option. Theoretically the option is an american type option and should be exercised if its in the money. The hardest question is human behaivor.
ImoIamAGod 1 year ago
@ImoIamAGod Yes, of course I fully agree: homeowner owns (pays) for an embedded call option. I just meant to here start by introducing "traditional" metrics. They are not used, in isolation, by any modern practitioners who (to my knowledge) all use models that capture, to various degrees, the "incentives" of homeowners including refinancing as function of--but not only a function of--interest rate levels.
bionicturtledotcom 1 year ago