Answer-first summary for fast verification
Answer: Mortgage pools that refinanced heavily in the past tend to refinance again at higher-than-average rates; this is called "loyalty of repeat customers"
**Correct answer: D.** The statement is the opposite of the correct concept. The effect described is the **burnout effect**: mortgage pools that have already refinanced heavily in the past tend to become **less sensitive** to further interest-rate declines, not more likely to refinance at higher-than-average rates. Why the others are true: - **A is true**: prepayments are often seasonal, with summer months showing elevated activity. - **B is true**: prepayments are typically slower in the early years of a mortgage. - **C is true**: falling property values reduce refinancing incentives and can lower prepayments. Therefore, the false statement is **D**.
Author: Manit Arora
Ultimate access to all questions.
According to Veronesi, each of the following is true about mortgage prepayments EXCEPT:
A
Summers are characterized by large prepayments; this is called "seasonality"
B
The prepayment rate tends to be slow (low) in the early years of a mortgage
C
As property values decline, prepayments tend to decline
D
Mortgage pools that refinanced heavily in the past tend to refinance again at higher-than-average rates; this is called "loyalty of repeat customers"
No comments yet.