Investor Sentiment and Prepayment Hazard: the Case of Multifamily MBS Loans

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Journal of Real Estate Research

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Rising property prices are one explanation for higher prepayments of commercial mortgages as borrowers refinance to take out equity or sell their assets. However, prices may be driven not only by fundamentals but also investor irrationality. We investigate the informative value of investor sentiment for prepayments of loans underlying commercial mortgage-backed securities (CMBS). We employ Cox Proportional Hazard models to analyze a sample of 10,728 multifamily securitized loans for the period of 2001 to 2015. We find that, controlling for fundamentals, interest rates and loan characteristics, irrational investor sentiment can explain the exercise of the prepayment option by fixed- and floating-rate borrowers in times of increased property prices. The effect of irrational sentiment on prepayment hazard is robust to different sentiment measures as well as originator, geographic, and deal characteristics. Our findings suggest that irrational investor sentiment is a source of information for lenders and CMBS investors interested in predicting prepayments.


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