Mortgage-Backed Securities: Products, Structuring, and Analytical Techniques

ADDITIONAL FACTORS AFFECTING PREPAYMENT SPEEDS

As the previous discussion indicates, prepayment behavior can be highly complex, as it is subject to both market forces and changing consumer tastes. Ultimately, both turnover- and refinancing-based prepayments occur due to individual actions taken by or on behalf of the borrower. The earlier sections of the chapter highlighted the critical factors driving prepayment behavior, namely the level of interest rates, changes in home prices and price appreciation rates, and the level of real estate activity and sales. However, other factors related to either the borrower or the obligation itself can also impact prepayment behavior. We previously described the effect of loan size on the refinancing decision, but other borrower- and loan-level factors also influence how specific loans and securities prepay.

Credit

The effect of creditworthiness and borrower wealth on prepayments is complex and somewhat contradictory. Evidence suggests that both very high and very low credit borrowers tend to prepay somewhat faster than the “average” borrower. Borrowers with very high credit scores and significant financial resources tend to respond to refinancing opportunities very actively, in large part due to their greater financial acumen and resources. In addition, their homes and loan sizes tend to be larger, all things equal, which creates a greater savings in monetary terms for the borrower.

However, loans made to borrowers with very low credit ...