Mortgage Prepayments: Past and Present

Over the past two decades, research into the economic reasons why borrowers prepay their mortgage loans has matured into a coherent body of work that has a sound theoretical framework and consistent empirical validation. This paper summarizes progress to date in five general areas: the impact of refinancing on the cash flows and yields of mortgage-backed securities, analytical research into the value of the borrower's prepayment option, determinants of prepayment rates on mortgage pools, analyses of individual borrower behavior, and prepayment forces in the market for adjustable rate loans. Unresolved issues and suggestions for future research are also considered.