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Title:Household tenure and the mortgage prepayment
Author(s):Yang, Tai-le
Doctoral Committee Chair(s):Colwell, Peter F.
Department / Program:Finance
Degree Granting Institution:University of Illinois at Urbana-Champaign
Subject(s):Economics, Finance
Abstract:This thesis analyzes the relationship between the household's tenure and the mortgage prepayment. The household tenure is the time a home buyer resides in the mortgaged home. During the last decade, most of the home mortgages originated carried due-on-sale clauses, which force borrowers to pay off their mortgages as soon as the underlying real estate parcels are sold. Under such a restriction, the effective life of a mortgage is the minimum of its term and the household's tenure in the mortgaged home. Since most households do not keep their house for as long as the maturity of the mortgage (e.g. 30 years), the effective life of the mortgage is generally determined by the household's tenure.
The household's tenure affects the mortgage prepayment mainly through the expiration date of the prepayment option. The prepayment to refinance a fixed rate mortgage is a very special option. Its expiration date is the end of the effective life of the mortgage. Not only is this expiration date random, but also the information set about this variable is asymmetric between the lender and the borrower. The major contribution of this thesis to the literature is to generalize the previous prepayment option pricing models by relaxing the naive assumptions about the expiration date.
The assumptions of this household tenure in the previous literature are relaxed in two respects, (1) the assumption that this tenure is non-stochastic is relaxed in chapter two, and (2) the assumption that the information is symmetric between the lender and the borrower is relaxed in chapter three and four. Mortgage pricing models for these two generalized situations are developed. The models are applied in determining (1) the value to the borrower of the mortgage, (2) the interest rate differential needed to justify prepayment, (3) the borrower's choice among different contract rate-discount points combinations, and (4) the value to the lender of the mortgage.
Issue Date:1991
Rights Information:Copyright 1991 Yang, Tai-le
Date Available in IDEALS:2011-05-07
Identifier in Online Catalog:AAI9211047
OCLC Identifier:(UMI)AAI9211047

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