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3: A variable-rate loan-prepayment model for Australian mortgages.(Report)
Abstract:
This paper is an investigation of Australian mortgage-loan prepayment from a modelling perspective. A prepayment model for loans of mortgage-backed securities is developed specifically for the Australian mortgage market, and then empirically tested using (Reuters) Australian mortgage-backed security data. The model has origins in the variable-rate loan-prepayment models of the U.S., but is designed and developed to take into account the Australian mortgage-market structure. The model proves very successful when tested empirically, and is able to explain the partial-prepayment features of the Australian market as well as full prepayments.
Keywords:
PREPAYMENT MODELLING; AUSTRALIAN AND U.S. MORTGAGE MARKETS; VARIABLE-RATE LOANS, FIXED-RATE LOANS; MORTGAGE-BACKED SECURITIES; MORTGAGE RATES, PARTIAL PREPAYMENT; INVESTMENTS.
1. Introduction
The development and empirical testing of a mortgage-backed security, (MBS), prepayment model appropriate for the Australian mortgage market is the focus of this paper.
The main reason for creating prepayment models is to inform MBS investors about what the determinants of prepayments are, and how changes in these determinants will affect prepayments. Prepayment estimation (achieved through prepayment modelling) is a necessary intermediate step in the process of MBS valuation. Prepayment models are also more broadly relevant to all those associated with mortgage finance.
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