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

Patric H. Hendershott, Kevin E. Villani

NBER Working Paper No. 738
Issued in August 1981
NBER Program(s):Monetary Economics

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.

download in pdf format
   (435 K)

download in djvu format
   (292 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w0738

Published: Hendershott, Patric H. and Kevin E. Villani. "Measurement of Spreads between Yields on Various Mortgage Contracts and Treasury Securities." Journal of the American Real Estate and Urban Economic Association, (Winter 1984), pp. 476-490. James Shilling added as co-author.

Users who downloaded this paper also downloaded* these:
Longstaff w10422 Optimal Recursive Refinancing and the Valuation of Mortgage-Backed Securities
Mayer, Piskorski, and Tchistyi w16586 The Inefficiency of Refinancing: Why Prepayment Penalties Are Good for Risky Borrowers
Lerner and Stern Introduction to "Innovation Policy and the Economy, Volume 16"
McInnes and Shinogle w15039 Physical Activity: Economic and Policy Factors
Hendershott, Hu, and Villani w0918 The Economics of Mortgage Terminations: Implications for Mortgage Lenders and Mortgage Terms
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us