PT  - JOURNAL ARTICLE
AU  - Sherman Davis
TI  - An ARMs Prepayment Model
AID  - 10.3905/jfi.2004.391029
DP  - 2004 Mar 31
TA  - The Journal of Fixed Income
PG  - 73--79
VI  - 13
IP  - 4
4099  - https://pm-research.com/content/13/4/73.short
4100  - https://pm-research.com/content/13/4/73.full
AB  - This research provides evidence that a parsimonious prepayment speed model, using publicly available resources, can reasonably project prepayment speeds for single-family one-year Fannie Mae ARMs. Two incentives to refinance appear to be the two strongest predictors of projected prepayment speeds for the 1997–2001 period. A 100 basis point increase in the ARM-to-ARM incentive to refinance variable increased prepayment rates by 2.8%, holding other model variables constant. A 100 bp increase in the incentive to refinance from an adjustable-rate mortgage to a fixed-rate mortgage increased the prepayment rate of Fannie Mae-issued single-family ARMs by 2.3%. A limited approach to modeling adjustable-rate mortgages may thus be a cost-effective alternative to costlier and more sophisticated models.