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).