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Finance and Economics Discussion Series
Finance and Economics Discussion Series logo links to FEDS home page The Effects of Mortgage Prepayments on M2
Yueh-Yun C. O'Brien

Abstract: Mortgage prepayments can contribute significantly to fluctuations in M2 growth rates. These mortgage prepayment effects are primarily driven by certain rules of mortgage-backed-security (MBS) insurers that require mortgage servicers to hold in M2-type deposits the prepayment proceeds due to MBS investors. This paper provides a methodology for estimating prepayment effects on M2. The effects are estimated separately for refinancing and home sales. The results indicate that excluding the mortgage prepayment effects from M2 produces smoother monthly growth rates. The stability of the relationship between money and GDP as measured by M2 velocity is also increased. Refinancing prepayments account for most of the prepayment effects on M2.

Keywords: Mortgage prepayments, M2, refinancing, home sales

Full paper (224 KB PDF)

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Last update: October 6, 2005