Mortgage Rates, Homeowner Lock-In, and MBS Turnover
Summary
The document explains that mortgage-pool turnover reflects more than the prevailing mortgage rate. Home sales and moves are described as depending primarily on loan age and strong seasonal patterns, while refinancing responds more directly to the incentive to replace an existing mortgage with a cheaper one. When market rates fall, refinancing can initially increase, but that behavior is distinct from turnover caused by homeowners moving.
A low-rate mortgage can discourage its borrower from moving when a new home would require financing at a higher current rate. This lock-in effect is modeled as a slowdown related to the gap between the pool’s weighted average coupon and a measure of current mortgage rates. The answer suggests comparing slightly out-of-the-money pools with deeply out-of-the-money pools to identify this effect. These are modeling intuitions, not quantified estimates; the discussion does not detail other drivers of mobility or provide a calibration method. A second answer offers a simplified refinancing explanation, which should not be conflated with home-sale turnover.
Key ideas
- Mortgage turnover from moving is linked to loan age and seasonal patterns.
- Refinancing incentives depend on potential savings relative to the borrower’s existing rate.
- Homeowners with mortgages far below current rates may move less often because of financing lock-in.
- The coupon gap can be used as a multiplicative adjustment to a baseline turnover model.
- Refinancing and home-sale turnover are related to rates in different ways.
Tags
Full text
# How turnover rate is dependent on mortgage rate? # How turnover rate is dependent on mortgage rate? I am new to finance so may be this is a silly question but I got stuck here. I was thinking about how turnover rate is dependent on mortgage rate? I was reading MBS by Lakhmir Hayre, there I had seen as mortgage rates are down, turnover rates first increase and after a long time they revert towards historical mean and vice-versa. Can anybody please explain this relation? Is this because when mortgage rates are high, the borrower will not move to a new house because he don't want a loan on high rate? Thanks ## Answer by NBF (score 1) https://quant.stackexchange.com/a/41340 Turnover or moving home is, to first order just a function of mortgage age with some strong seasonal patterns, just like refi is related to first order to the mortgage rate and some measure of the savings which would be had by refinancing. It is known though that homeowners who have secured a particularly low rate compared to the prevailing mortgage rate will not move as often as those with close to current commitment rates. This is called lock-in and is sometimes modelled via a multiplicative factor which slows turnover based on the WAC and Current Coupon (ie some measure of the expenses that would be incurred if financing a loan at the prevailing rate vs the rate the homeowner has secured). Usually turnover is fit using slightly out of the money mortgage pools. Lock-in would be found by comparing these to deeply out of the money mortgage pools. ## Answer by user31482 (score 0) https://quant.stackexchange.com/a/37845 It is a common sense. As mortgage rate goes down, borrowers of existing mortgages find their rates less attractive and costly. So they tend to switch to prevailing lower rates by refinancing their mortgages, then the turnover rate goes up. To the point where no borrowers find it worth, the rate reduces.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.