Mortgage Prepayments and an Analysis of the Wharton Prepayment Model

Predicting the behavior of homeowners in paying or prepaying their mortgages is a key feature of both pricing and portfolio management models. All major players in the market of mortgage-backed securities have to deal with the idiosyncracies of mortgage owners. A variety of prepayment models are currently in routine use by Wall Street firms, insurance and pension fund companies, investment advisory firms, and mortgage agencies. However, most of these models are proprietary, and the analytics underlying them are carefully guarded. We evaluate empirically a model developed at the Wharton School, intending to validate a model developed in academia—whose details are available in the open literature [Kang and Zenios 1992]—by using standard industrial tests.