Using a decision tree to analyze mortgage borrower decision behavior and values concerning interest rates and house prices
✍ Scribed by En-Der Su
- Publisher
- John Wiley and Sons
- Year
- 2010
- Tongue
- English
- Weight
- 354 KB
- Volume
- 31
- Category
- Article
- ISSN
- 0143-6570
- DOI
- 10.1002/mde.1514
No coin nor oath required. For personal study only.
✦ Synopsis
In reality, mortgage borrowers are more seriously concerned with the current mortgage boundary (i.e. option exercise) value than with the current option value (i.e. expected present value of the prospective option exercise value). Hence, by combining a simulation framework and a decision tree, the terminations of mortgage behavior can be classified forward but not backward as by the binomial lattice. After simulating 5000 projections for both Taiwan house prices and interest rates, as well as computing for current mortgage boundary values obtained by modifying Ambrose and Buttimer (2000) to step through the mortgage decision tree, the result shows that the prepayment is affected by rising interest rate volatility. Moreover, the delinquency and the reinstatement are affected by both rising interest rate and house price volatilities. However, due to the cost of delinquency and credit penalties, the foreclosure could not compete over the reinstatement when house prices and interest rates are in a high-volatility situation. The reinstatement is encouraging for the borrowers.