The Terminations Premium in Mortgage Coupon Rates: Evidence on the Integration of Mortgage and Bond Markets

29 Pages Posted: 18 Aug 2004 Last revised: 10 Jul 2010

See all articles by Patric H. Hendershott

Patric H. Hendershott

University of Aberdeen - Centre for Property Research; National Bureau of Economic Research (NBER)

Kevin E. Villani

Imperial Credit Industries, Inc.

Date Written: August 1981

Abstract

During the Last three years mortgage rates have risen relative to yields on comparable maturity bonds. The questions addressed in the present paper are what is the extent of this increase and to what is it attributable? We find the increase between early 198 and early 1981 in coupon rates on GNMA mortgage pools relative to ''the" rate on a comparable portfolio of Treasury bonds to be about 100 basis points. We attribute the increase to a rise in the terminations premia built into mortgage coupon rates. The premia is the price borrowers are charged for the option to repay the mortgage when it is to their benefit (to refinance if interest rates decline). This price has risen in response to an increase in interest rate uncertainty. Our empirical results suggest that the increase is due to both greater uncertainty regarding the inflation premium in interest rates and the lesser weight the monetary authorities give to interest rate stability in their deliberations.

Suggested Citation

Hendershott, Patric H. and Villani, Kevin E., The Terminations Premium in Mortgage Coupon Rates: Evidence on the Integration of Mortgage and Bond Markets (August 1981). NBER Working Paper No. w0738, Available at SSRN: https://ssrn.com/abstract=349127

Patric H. Hendershott (Contact Author)

University of Aberdeen - Centre for Property Research ( email )

Aberdeen AB24 2UF
Scotland

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Kevin E. Villani

Imperial Credit Industries, Inc.

23550 Hawthorne Blvd., Ste. 110
Torrance, CA 90505

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