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FHA Terminations: A Prelude to Rational Mortgage Pricing
Author(s) -
Foster Chester,
Order Robert
Publication year - 1985
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/1540-6229.00355
Subject(s) - prepayment of loan , mortgage underwriting , mortgage insurance , commercial mortgage backed security , collateralized mortgage obligation , economics , valuation of options , shared appreciation mortgage , put option , secondary mortgage market , financial economics , synthetic cdo , actuarial science , finance , insurance policy , casualty insurance
Recent models of pricing mortgages and/or mortgage insurance have used option‐pricing models as their framework. The focus is usually on default, which is viewed as a put option (to sell the house to the lender in exchange for the mortgage) and prepayment, which is viewed as a call option (to buy the mortgage from the lender). Analysis then uses techniques like those used to price options in capital markets. Unfortunately, homeowners do not seem to exercise their option as quickly as do traders in organized markets. We estimate prepayment and default functions, which are meant to be a first step in developing modified, option‐based models of mortgage pricing.