Pricing Mortgage-Backed Securities: Integrating Optimal Call and Empirical Models of Prepayment

Residential mortgage borrowers frequently appear to behave suboptimally with respect to their mortgage prepayment options. Many borrowers fail to exercise even well-into-the-money options while others prepay when the call option is out-of-the-money. To account for these apparently suboptimal prepayments, the recent trend in mortgage-backed securities research has been away from optimal call valuation models, in which the decision to exercise is determined endoge-nously, in favor of models in which prepayment behavior is exogenously specified based on empirical estimation. This paper develops a rational model of mortgage prepayment which incorporates both types of "non-optimal" prepayment and retains endogenous call. This enables the model to disentangle and compare the separate effects of the interest rate call, impeded by transaction costs, and of non-interest-rate driven prepayment. In addition, by recognizing heterogenous borrower transaction costs, the model presents a way to account more precisely for the varying prepayment lags associated with well-into-the-money call options and to account for the phenomenon of "burnout" within a mortgage pool. The paper includes an empirical test of the unbiasedness of the integrated pricing model by comparing simulated prices from our theoretical model to observed prices on traded Fannie Mae and GNMA securities. Copyright American Real Estate and Urban Economics Association.

Ridge augmentation by applying bioresorbable membranes and deproteinized bovine bone mineral: a report of twelve consecutive cases

OBJECTIVE: Lateral ridge augmentations are traditionally performed using autogenous bone grafts to support membranes for guided bone regeneration (GBR). The bone-harvesting procedure, however, is accompanied by considerable patient morbidity. AIM: The aim of the present study was to test whether or not resorbable membranes and bone substitutes will lead to successful horizontal ridge augmentation allowing implant installation under standard conditions. MATERIAL AND METHODS: Twelve patients in need of implant therapy participated in this study. They revealed bone deficits in the areas intended for implant placement. Soft tissue flaps were carefully raised and blocks or particles of deproteinized bovine bone mineral (DBBM) (Bio-Oss) were placed in the defect area. A collagenous membrane (Bio-Gide) was applied to cover the DBBM and was fixed to the surrounding bone using poly-lactic acid pins. The flaps were sutured to allow for healing by primary intention. RESULTS: All sites in the 12 patients healed uneventfully. No flap dehiscences and no exposures of membranes were observed. Nine to 10 months following augmentation surgery, flaps were raised in order to visualize the outcomes of the augmentation. An integration of the DBBM particles into the newly formed bone was consistently observed. Merely on the surface of the new bone, some pieces of the grafting material were only partly integrated into bone. However, these were not encapsulated by connective tissue but rather anchored into the newly regenerated bone. In all of the cases, but one, the bone volume following regeneration was adequate to place implants in a prosthetically ideal position and according to the standard protocol with complete bone coverage of the surface intended for osseointegration. Before the regenerative procedure, the average crestal bone width was 3.2 mm and to 6.9 mm at the time of implant placement. This difference was statistically significant (P<0.05, Wilcoxon's matched pairs signed-rank test). CONCLUSION: After a healing period of 9-10 months, the combination of DBBM and a collagen membrane is an effective treatment option for horizontal bone augmentation before implant placement

Mortgage Pricing: What Have We Learned So Far?†

Much progress has been achieved in the valuation of call options and mortgages. Preliminary evidence suggests that the observed term structure of interest rates (the full structure, not just the end-points) and a reasonable estimate of the volatility of spot rates is sufficient for pricing purposes. Knowledge of the precise nature of the interest-rate process and the exact market price of interest-rate risk, the not-well-identified determinants of the term structure, are not necessary for pricing. Moreover, the number of interest-rate state variables is also of little import, again holding the term structure and rate volatility constant. Copyright American Real Estate and Urban Economics Association.

Predatory Lending Laws and the Cost of Credit

Various states and other local jurisdictions have enacted laws intending to reduce predatory and abusive lending in the subprime mortgage market. These laws have created substantial geographic variation in the regulation of mortgage credit. This article examines whether these laws are associated with a higher or lower cost of credit. Empirical results indicate that the laws are associated with at most a modest increase in cost. However, the impact depends on the product type. In particular, loans with fixed (adjustable) rates are associated with a modest increase (decrease) in cost. Copyright 2008 American Real Estate and Urban Economics Association