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Answer: Probability of 30-day delinquency
**Correct answer: D — Probability of 30-day delinquency** An **incentive function** in mortgage prepayment models measures the borrower's financial benefit from refinancing or prepaying. Examples include: - the **present value** of savings from lower mortgage payments, - the **difference** between the existing mortgage rate and the current market coupon rate, - the **reduction in monthly payment** after refinancing. The **probability of 30-day delinquency** is not an incentive to prepay; it is a credit/behavioral risk variable, not a refinancing incentive.
Author: Manit Arora
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Q-54.1 Each of the following is an example of a mortgage loan INCENTIVE FUNCTION EXCEPT for:
A
Present value of reduction in mortgage payments if loan is refinanced
B
Difference between existing mortgage rate and current coupon rate
C
Reduction in monthly payment level as a result of refinancing
D
Probability of 30-day delinquency
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