The purpose of this paper is to determine whether prepayment risk impacts the performance of mortgage companies and/or mortgage REITs. Previous research finds prepayment risk impacts bank returns and also impacts bank loan returns (He, 2007; Fayman & He, 2011). This paper uses regression analysis to measure the prepayment risk premium and then uses those results as a dependent variable in several separate regression models that utilize performance metrics as the independent variable. The results indicate that prepayment risk has a positive impact on sales growth in mortgage companies and also has a negative impact on ROE and a positive impact on ROA in mortgage companies. One possible explanation for this finding is mortgage companies may opt to sell mortgages faster in interest rate environments that have higher levels of prepayment risk. However, prepayment risk appears to have little to no impact on the performance of mortgage REITs.
Fayman, Alex; He, Ling T.; and Casey, K. Michael
"A NOTE ON THE EFFECTS OF PREPAYMENT RISK ON MORTGAGE COMPANIES AND MORTGAGE REITs,"
Journal of International & Interdisciplinary Business Research: Vol. 1
, Article 6.
Available at: http://scholars.fhsu.edu/jiibr/vol1/iss1/6