RT Journal Article
SR Electronic
T1 An ARMs Prepayment Model
JF The Journal of Fixed Income
FD Institutional Investor Journals
SP 73
OP 79
DO 10.3905/jfi.2004.391029
VO 13
IS 4
A1 Sherman Davis
YR 2004
UL https://pm-research.com/content/13/4/73.abstract
AB This research provides evidence that a parsimonious prepayment speed model, using publicly available resources, can reasonably project prepayment speeds for single-family one-year Fannie Mae ARMs. Two incentives to refinance appear to be the two strongest predictors of projected prepayment speeds for the 1997–2001 period. A 100 basis point increase in the ARM-to-ARM incentive to refinance variable increased prepayment rates by 2.8%, holding other model variables constant. A 100 bp increase in the incentive to refinance from an adjustable-rate mortgage to a fixed-rate mortgage increased the prepayment rate of Fannie Mae-issued single-family ARMs by 2.3%. A limited approach to modeling adjustable-rate mortgages may thus be a cost-effective alternative to costlier and more sophisticated models.