Monthly Prepayment Risk for Mortgages and Monthly Mortgage Rates
The Graph of the Week shows the relationship between prepayment risk for mortgages and monthly mortgage rates. The graph comes from "Does Prepayment Risk of Mortgages Affect Excess Returns of Bank Stocks?" by Ling T. He from the January 2007 issue of Business Economics. From the article:
Figure 1 clearly shows variations in the linear relation between prepayment risk premiums and monthly mortgage rates. The relation is negative over periods of 1/1972 - 12/1979 and 1/1990 - 12/2002. Monthly mortgage rates in these periods were relatively low. The relation turns positive over the period of 1/1980 - 12/1989 with higher mortgage rates. The summary statistics in Table 3 indicate that the average monthly mortgage rate is 0.71 percent (about 8.5 percent annual) for the periods of 1/1972 - 12/1979 and 1/1990 - 12/2002, and the correlation between prepayment risk premiums and mortgage rates is -20.1 percent; while for the period of 1/1980 - 12/1989 the correlation becomes 26 percent and the average monthly mortgage rate is one percent (12 percent annual).
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