We use an implicit alternating direction numerical procedure to estimate the value of a fixed-rate mortgage (FRM) with embedded default and prepayment options. The value of FRMs depends on interest rates, the house value, and mort- gage maturity. Our numerical results suggest that the joint option value of pre- payment and default is considerably high, even at loan origination. We extend the model to include prepayment penalties in FRM valuation.
ASJC Scopus subject areas
- Business, Management and Accounting(all)
- Economics and Econometrics