Abstract: Paper No. 177
Ruthless Prepayment? Evidence From Multifamily Mortgages
James R. Follain, Jan Ondrich, and Gyan P. Sinha
Estimates of a prepayment function for multifamily mortgages are reported in this paper. These are among the first attempts to estimate such a function; most previous work along these lines focuses on single family mortgages. A further distinguishing aspect of the paper is its attempt to incorporate the impact of unobservable factors on the mortgage refinancing decision. A variant of the maximum likelihood procedure first developed by Meyer (1987) is employed. The results indicate an overall positive duration dependence for the conditional prepayment rate. The estimated response of prepayments to a change in the market rate of interest is significant with the expected sign; it is also larger once the effect of unobserved heterogeneity is taken into account. Nonetheless, the magnitude of the response is substantially less than that predicted by the ruthless option pricing model.