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Title:The Pricing of Mortgage Characteristics and Consumer Choice in the Mortgage Market
Author(s):Marshall, David Wayne
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 dissertation covers several aspects of mortgage pricing. First, a theoretical model is developed related to choice on both sides of the mortgage market. Next, an hedonic model is utilized to estimate the impact of mortgage characteristics on the initial contract interest rate. Finally, borrower demand for various adjustment interval periods is estimated.
The supply side begins with a determination of the cost of funds facing the lender. This rate is then adjusted downward to account for such items as: points and any markup (margin) passed on to the borrower. Other features, however, serve to increase the effective cost of funds such as: administrative costs, interest rate caps, teasers, the risk of a drop in housing prices causing the lender to have to deal with a default, and the risk of a drop in interest rates causing the borrower to refinance. The demand side is reflected by the willingness of borrowers to pay for various contract features.
Among the terms to be included in the hedonic model are the caps, the amortization period, and the period between rate adjustments. A key hypothesis here relates to the role of default risk in explaining peculiarities in the most frequently adjusted loans. The demand for variability is measured using the well-known approach developed by Sherwin Rosen. After taking the derivative of the rate with respect to the variability, the borrower characteristics are used as explanators along with the explanatory variables from the hedonic.
The empirical results indicate that the interest rate on a mortgage is significantly influenced by: the general level of interest rates, the markup on the loan, the quantity of teasers, whether or not the mortgage allows for negative amortization, the steepness of the yield curve, the volatility of interest rates, and several of the location variables.
Issue Date:1988
Description:137 p.
Thesis (Ph.D.)--University of Illinois at Urbana-Champaign, 1988.
Other Identifier(s):(UMI)AAI8908769
Date Available in IDEALS:2014-12-16
Date Deposited:1988

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