Hi everyone, When we have a growing economy, does prepayment increase/decrease? Reasoning 1: Growing economy = rise in personal income = higher prepayment Reasoning 2: Growing economy = higher interest rates = lower prepayment True/false?
Book tells us to look at a. Prevailing Mortgage rate reflected in the spread between what the borrower is paying and what is prevailing. - this provides the incentive to refinance. - the path of how the rates have moved - determine whether or not the refinancing bait will be taken (refinancing burnout syndrome). b. Housing turnover a lower mortgage rate increases affordability of homes c. characteristics of mortgage loans amount of seasoning and geographic location of underlying property. prepayment rates are low on new loans, increase as the loan becomes more seasoned. they tend to level off when loan becomes fully seasoned. in some regions more refinancing occurs than in other areas. as factors affecting prepayment behavior. Condition of the economy itself - growing vs. not is not mentioned as a factor specifically towards its effect on prepayment behavior. Among what you have mentioned - rise in personal income in a growing economy is not a given. You might just see something meeting to match /cover the rise in inflation - and this would not result in higher prepayments. Rise in interest rates - hence lower prepayment is a definite possibility, in my mind.