Demographic versus option-driven mortgage terminations

This study examines mortgage termination behavior at the household level, including fixed-rate mortgage terminations due to call, default, and mobility behavior. It exploits information in the American Housing Survey to examine national cross sections of 6119 and 4160 owner households. While accounting for the influence of interest rate movements in motivating termination-the call option influence-the study uses two sequential panels to investigate the modifying effect of household financial, demographic, and location characteristics upon termination behavior. Although we find the effect of the call option (systematic effect) to be highly significant in explaining terminations in a declining interest rate environment, we also find that demographic and locational effects (diversifiable) are potentially at least as significant. This result suggests that incomplete diversification over the nonsystematic factors of demography and location could cause significant variation in termination rates. (C) 1997 Academic Press.