Answer: Both (a) and (b)

From a valuation perspective, mortgage borrowers should prepay when interest rates are low and should generally *not* prepay when rates are high. Therefore: - **Prepayment at high rates due to housing turnover** is sub-optimal because the borrower is exercising the prepayment option when it is not economically attractive. - **Lack of prepayment at low rates** is also sub-optimal because the borrower is failing to exercise the option when it has value. So the correct choice is **both (a) and (b)**.

Author: Manit Arora