Answer: Sluggish response to high interest rates

The question asks for the **EXCEPT** choice, meaning the one that does **not** explain sub-optimal prepayment behavior. - **Sluggish response to low interest rates** can cause borrowers to miss the optimal time to refinance. - **Media effect** can contribute to waves of refinancing when rate declines are widely publicized. - **Burnout effect** means borrowers who have not refinanced after prior rate declines may become less likely to do so later. - **Sluggish response to high interest rates** is not a problem from a valuation standpoint, because borrowers generally should *not* prepay when rates are high. Therefore, the correct answer is **B**.

Author: Manit Arora