Prepayment Behavior Research Articles

An Empirical Research on Heterogeneity of Mortgage Prepayment Behavior: Focusing on Debtor’s Income and Age Level

This empirical research conducted survival analysis on fixed rate mortgage loans to examine the existence of heterogeneity on prepayment behavior by debtors’ income and age level characteristics. The loans studied originated between 2010 and 2015, and were acquired from Korea Housing Finance Corporation. Income-wise, debtors belonging to the median level group and age wise, those belonging to the youngest ‘X generation’ demonstrated the highest hazard ratio. We also confirmed that both, regulations and aging effects, alter the prepayment behavior of debtors. Finally, we confirmed that there is substantial prepayment hazard gap among debtors with similar loan conditions. This research will help improve the prepayment forecasting model implemented in the field, by considering such characteristics, and promote further research on prepayment behavior by considering various dimensions of debtor and loan characteristics.

Prepayment and credit utilization in peer-to-peer lending

PurposeThis research analyzes borrowers' credit utilization through prepayment behavior in peer-to-peer (P2P) lending. The authors investigate factors influencing the decision to prepay and assess the role of P2P lending as an alternative source of consumer credits.Design/methodology/approachThe authors use individual loan-level data from the LendingClub, one of the largest P2P platforms in the USA. The authors use a Logit model and a sample selection model estimated by the two-stage Heckman method. The empirical analysis considers borrower-specific and loan-specific characteristics as well as macroeconomic factors.FindingsThe authors present a number of significant findings that can enhance understanding consumers' financing decisions. The authors offer evidence that borrowers are able to take advantage of cheaper loans offered by P2P lending to better manage credit card balance and consolidate debt. The authors find that borrowers tend to prepay P2P loans quickly when the aggregate cost of borrowing is low, suggesting that P2P lending offers an efficient alternative to obtain credit. This is particularly true for creditworthy borrowers that are able to take advantage of competing sources of finance. The authors' results provide evidence that P2P lending can improve consumers' optimal credit utilization.Originality/valueP2P lending has grown exponentially and has become a significant credit supplier to consumers and small businesses. While the existing literature mostly focuses on default risks, prepayment has received much less attention. This research fills in the gap and investigates borrowers' prepayment behavior in P2P loans and the role of P2P lending as an alternative source of consumer credits.

Practical Applications of Primer on Agency Mortgage-Backed Securities Specified Pools and Their Convexity Profiles

In <b>Primer on Agency Mortgage-Backed Securities Specified Pools and Their Convexity Profiles</b> from the Spring 2022 issue of <b><i>The Journal of Fixed Income</i></b>, authors <b>Glenn M. Schultz</b> (of <b>MUFG Securities</b>) and <b>Frank J. Fabozzi</b> (of <b>Johns Hopkins University</b> and <b>EDHEC Risk Institute</b>) describe the various sectors of the market for agency mortgage-backed securities (MBS) specified pools. While most MBS are traded on a generic basis—without identifying the underlying pool of mortgage loans—some trades specify the particular underlying pool of the security that must be delivered to clear the trade. The first type of trade is called a to-be-announced (TBA) trade, and the second type is called a specified-pool trade. When market participants trade agency MBS on a specified pool basis, they generally do so because they expect the loans in the underlying pools to display atypical prepayment behavior, which gives the related MBS atypical convexity properties. Specified pools are categorized into sectors, based on loan balance, loan-to-value (LTV) ratio, and geographical location, plus whether they consist of refinanced mortgages or mortgages for investment properties, relocating employees, or people with suboptimal credit scores. The authors describe each specified-pool sector and its convexity profile. Most have positive convexity relative to generic pools and trade at a premium, but jumbo and relocation mortgage pools have negative convexity relative to generic pools and trade at a concession. Investors can manage risk by allocating assets to customize the convexity profiles of their MBS portfolios.

Reinforcement learning and mortgage partial prepayment behavior

An agent can learn from previous experience to make decisions. Several important studies claim that reinforcement learning plays a key role in explaining the evolution of the individual learning process. This paper studies the likelihood of mortgage partial prepayments and the process through which mortgage borrowers learn from making partial prepayment decisions in the residential mortgage market in China. Learning dynamics are measured by studying the mortgage partial prepayment behavior of individual borrowers. A longitudinal discrete choice model of the choice of the mortgage payment is presented and estimated using a rich set of mortgage loan history data from a leading mortgage lender in China. The results indicate that path dependency and reinforcement learning arise whenever a borrower's “partial prepayment” decision depends not only on current-stage variables and his/her individual characteristics but also on the learning experience (both from himself/herself and others). Borrowers with more partial prepayment experience in previous stages have a higher probability of making the same decision in the future. Moreover, learning dynamics are not monotonic, and recent experience plays a larger role than distal experience in determining a partial prepayment decision.

Rank-Based Error Tracking for Agency MBS Prepayment Models

Mode testing, also called error tracking, is a key requirement for collateral behavior forecasting models in securitized product, including models of prepayment, default, response, utilization, etc. The high dimensionality and statistical noise associated with agency mortgage-backed securities prepayment behavior make error tracking a complex task. The traditional method focuses on single dimension, for example, along vintage coupon, and does not provide a clear measure of model accuracy and effectiveness. The new method, a rank-based error-tracking methodology, provides an efficient and comprehensive approach to measure model performance. It provides a clear definition of accuracy-which allows clear measure to compare among models. This is superior to the existing one-dimensional method, and other supplement methods (e.g., lift curve method for loans). We discuss these issues as well as applicable statistical theory, and potential applications. <b>TOPICS:</b>MBS and residential mortgage loans, factor-based models <b>Key Findings</b> • The proposed ranked-based error tracking provides a comprehensive and consistent measure for model performance across macroeconomic environment and across pool/loan attributes, superior to the prevailing one-dimensional error-tracking methodology. • Two key measures are the steepness and accuracy of the ranking curve. The steepness measures quantify the model’s ability differentiating across macro and pool variables. The accuracy measures quantify the model’s ability forecasting the prepayment intensity. • The rank-based methodology can be applied to any selected sample pool universe and performance periods. It can be systematically used for model review and model comparison.

Mortgage Prepayment, Race, and Monetary Policy

This paper documents large differences in mortgage prepayment behavior across racial and ethnic groups in the United States, which have significant implications for monetary policy, inequality, and pricing. Using a novel data set that combines administrative data on mortgage performance with information on race and ethnicity, we show that Black and Hispanic white borrowers have significantly lower prepayment rates compared with Non-Hispanic white borrowers, holding income, credit score, and equity constant. This gap is on the order of 50 percent and largely reflects different sensitivities to movements in market interest rates, and was particularly pronounced during QE1. Differences in prepayment speeds result in large disparities between white and minority borrowers in the distribution of rates paid on outstanding mortgages, which widens during periods of low mortgage rates and high refinance volumes. From 2010 to 2014, Black borrowers were paying 30 to 45 basis points more on average than Non-Hispanic whites despite only a small gap of about 5 basis points between the groups at the time of mortgage origination. The large differences in prepayment behavior have important pricing implications, as they suggest that minority borrowers are overpaying for their prepayment option. Our results show that inequality in mortgage markets is larger than previously realized and is exacerbated by expansionary monetary policy.

Determinants of Housing Mortgage Prepayment in Korea: Using a Loan-Level Dataset

본 연구는 개별 주택담보대출 자료를 이용하여 주택담보대출 조기상환 위험에 영향을 주는 요인을 분석하였다. 이를 위해 2013년 1월~2014년 12월에 계약한 보금자리론 자료를 이용하여 콕스 비례위험모형과 시ㆍ군ㆍ구의 관찰되지 않는 이질성을 효과적으로 처리할수 있는 공유 프레일티 모형을 추정하였다. 공유 프레일티 모형의 추정결과를 통해 동일한 시ㆍ군ㆍ구에 거주하는 차입자간의 상관성이 조기상환 위험에 영향을 주고 있음을 확인하 였다. 한편 주택가격 예상 변화율과 담보주택가격 변화율이 조기상환 위험에 각각 음(-)과 양 (+)의 영향을 주는 것으로 나타나 내 집 마련을 위한 주택금융정책의 일환인 보금자리론이 자본이득을 위한 투자목적의 주택구입에 이용될 수 있는 것으로 보인다. 양도소득세 비과세 조건이 충족되는 24개월에 조기상환 위험률이 급증하는 현상은 이를 뒷받침한다. 한편 담보주택가격 변화율을 그 증감에 따라 구분한 담보주택가격 증가율과 감소율은 모두 조기 상환 위험에 양(+)의 영향을 주는 것으로 나타났다. 담보가치가 감소한 경우 감소한 정도에 따라 전략적 조기상환이 하나의 대안이 될 수 있는 것으로 보인다. 이 외에도 조기상환 옵션가치, 주택담보대출비율(LTV), 총부채상환비율(DTI), 대출만기, 거치기간, 차입자의 연령, 소득, 신용등급이 조기상환 위험에 유의한 영향을 주는 것으로 나타났다.This study empirically investigates housing mortgage prepayment behavior decisions in Korea. Using the loan-level data from 2013 to 2014, a Cox proportional hazard model and a shared frailty model which controls the effect of unobserved heterogeneity among local markets are estimated. The results show that there exists significant heterogeneity among the local markets. Ignoring this heterogeneity results in errors in estimating the prepayment behavior of borrowers. Estimation results show that the higher expected housing price change, the lower the hazard rate of prepayment and the higher collateral value change, the higher the hazard rate of prepayment. The sale for capital gains as well as refinance by option value may also cause prepayment. The greater the degree where the collateral value declines, the higher the hazard rate of prepayment. It means that distressed prepayment is an alternative when the collateral value declines. Estimation results also indicate that loan characteristics like LTV, loan amount, maturity period, grace period, and borrower characteristics like borrower’s age, income, credit rating are determinants of prepayment. Especially, low credit serves as a constraint on refinance.

Housing Consumption and Investment: Evidence from Shared Equity Mortgages

Academics have proposed hybrid products with equity features for the financing of housing. In spite of their risk-sharing benefits these products have not become mainstream. This paper studies an important exception, a UK government scheme which in the five years since its inception has provided almost £10 billion of equity financing. The analysis of the origination and prepayment behavior of households who have used the scheme highlights housing affordability constraints. A difference-in-difference analysis of an increase in the maximum government equity limit shows that households took advantage of the increase to buy more expensive properties, and not to reduce their mortgage debt and house price risk exposure. A counterfactual study of homebuyers who, instead of using the equity available, relied on high loan-to-value mortgages shows that their financing choices can be rationalized by an expected rate of house price appreciation of 7.7% per year. We draw general implications for how households approach their house purchase and financing decisions, taking advantage of the fact that the shared equity mortgages that we study allow the separation of the consumption and investment dimensions of housing.

Application of Fuzzy Model Analysis of Default and Prepayment Behaviours

This paper has debated Fuzzy Model in the context of default and prepayment behaviour, through theoretical and empirical analysis, this paper shows the law of default and repayment and the main factors affecting the risk of default and repayment. On this basis, it chooses appropriate measurement tools to control the risk, and provides some basic information for the default risk of housing mortgage loan. At the same time, it also provides commercial banks with evasion of personal housing mortgage. The default and repayment risks faced by loans provide further quantitative information.

International Real Estate Review

This paper develops a pricing model and derives a closed-form formula for valuing mortgage-backed securities (MBSs) that embed a barrier option feature while the optimal prepayment or refinancing choices of borrowers are endogenously determined. Given that ¡§real estate investors¡¨ tend to prepay a loan relentlessly, an MBS with a high concentration of investor borrowers implies a lower MBS value. We specify the prepayment behavior of borrowers by using the first hitting time as a proxy for the trigger point of prepayment when house prices or interest rates hit a pre-determined barrier. Our results show that the MBS value is positively related to loan to value and house price volatility while negatively related to the proportion of real estate investors and interest rate volatility. We also find evidence which shows that the MBS value may increase due to the effects of the ¡§longevity¡¨ of mortgages, which outweigh the effects of default or prepayment as house price volatility increases. This model provides a faster pricing tool of MBSs than Monte Carlo simulation while retaining higher model accuracy and consistency than the hazard model approach.

Financial incentives for mortgage prepayment behavior: Evidence from Dutch micro data

This paper exploits a unique set of Dutch micro data between 2006 and 2014 to analyze the heterogeneous responses in prepayment behavior to changes in financial incentives. Prepayment is defined as paying back a part of the mortgage on top of the contractual payment schedule, excluding refinancing. Because interest rates on savings have decreased while the rates on existing mortgages are generally fixed for some years, the value of prepaying a mortgage has increased. This corresponds with the surge in prepayments at the Dutch mortgage market. Using various econometric specifications, that take into account unobserved heterogeneity and endogeneity, the paper finds that incentives to prepay explain only a part of prepayment behavior. However, incentives to prepay explain a much larger part of prepayments for wealthier households and for households with a high net-of-tax interest rate differential.

Interest Rate Risk of Non-Maturity Bank Accounts: From the Marketing to the Hedging Strategy

We present a coherent management framework for non-maturity accounts to derive the hedging strategy from the marketing strategy to generate stable net interest income. Our framework consists of three building blocks: (1) a discrete-time dynamic term structure model for the evolution of interest rates, (2) an ordinal logistic regression for the bank's pricing behaviour, (3) an autoregressive process with external variables for the customers' withdrawal and prepayment behaviour. All blocks are based on the same periodic frequency. Hence, we can easily put them together for valuation under various interest rate and marketing assumptions and to build the dynamic hedging strategy.

An Agency Problem in the MBS Market and the Solicited Refinancing Channel of Large-scale Asset Purchases

In this paper, we document that mortgage-backed securities (MBS) held by the Federal Reserve exhibit faster principal prepayment rates than MBS held by the rest of the market. Next, we show that this stylized fact persists even when controlling for factors that affect prepayment behavior, and thus determine the MBS that are delivered to the Federal Reserve. After ruling out several potential explanations for this result, we provide evidence that points to an agency problem in the secondary market for MBS, which has not previously been documented, as the most likely explanation for the abnormal prepayment behavior of Federal Reserve-held MBS. This agency problem - a key feature of the MBS market - arises when originators of mortgages that underlie the MBS no longer share in the prepayment risk of the securities, thereby increasing incentives to solicit refinancing activity. Therefore, Federal Reserve MBS holdings acquired from originators as a result of large-scale asset purchases can help stimulate economic activity through a so-called \solicited refinancing channel.&amp;amp;quot; Finally, we provide an estimate of the additional refinancing activity resulting from the solicited refinancing channel in the years after the Federal Reserve&amp;amp;#x27;s first MBS purchase program, demonstrating that this channel conveyed savings on monthly mortgage payments to homeowners.

An Agency Problem in the MBS Market and the Solicited Refinancing Channel of Large-Scale Asset Purchases

In this paper, we document that mortgage-backed securities (MBS) held by the Federal Reserve exhibit faster principal prepayment rates than MBS held by the rest of the market. Next, we show that this stylized fact persists even when controlling for factors that affect prepayment behavior, and thus determine the MBS that are delivered to the Federal Reserve. After ruling out several potential explanations for this result, we provide evidence that points to an agency problem in the secondary market for MBS, which has not previously been documented, as the most likely explanation for the abnormal prepayment behavior of Federal Reserve-held MBS. This agency problem--a key feature of the MBS market--arises when originators of mortgages that underlie the MBS no longer share in the prepayment risk of the securities, thereby increasing incentives to solicit refinancing activity. Therefore, Federal Reserve MBS holdings acquired from originators as a result of large-scale asset purchases can help stimulate economic activity through a so-called refinancing channel. Finally, we provide an estimate of the additional refinancing activity resulting from the solicited refinancing channel in the years after the Federal Reserve's first MBS purchase program, demonstrating that this channel conveyed savings on monthly mortgage payments to homeowners.

PREPAYMENT OPTION OF A PERPETUAL CORPORATE LOAN: THE IMPACT OF THE FUNDING COSTS

We investigate in this paper a perpetual prepayment option related to a corporate loan. The short interest rate and default intensity of the firm are supposed to follow Cox–Ingersoll–Ross (CIR) processes. A liquidity term that represents the funding costs of the bank is introduced and modeled as a continuous time discrete state Markov chain. The prepayment option needs specific attention as the payoff itself is a derivative product and thus an implicit function of the parameters of the problem and of the dynamics. We prove verification results that allows to certify the geometry of the exercise region and compute the price of the option. We show moreover that the price is the solution of a constrained minimization problem and propose a numerical algorithm building on this result. The algorithm is implemented in a two-dimensional code and several examples are considered. It is found that the impact of the prepayment option on the loan value is not to be neglected and should be used to assess the risks related to client prepayment. Moreover, the Markov chain liquidity model is seen to describe more accurately clients' prepayment behavior than a model with constant liquidity.

Did Federal Reserve MBS Holdings Affect More than Asset Prices?

In this paper, we document that mortgage-backed securities (MBS) held by the Federal Reserve exhibit faster principal prepayment rates than MBS held by the rest of the market. Next, we show that this stylized fact persists even when controlling for factors that affect prepayment behavior, and thus determine the MBS that are delivered to the Federal Reserve. After ruling out several potential explanations for this result, we provide evidence that points to an agency problem in the secondary market for MBS, which has not previously been documented, as the most likely explanation for the abnormal prepayment behavior of Federal Reserve-held MBS. This agency problem --- a key feature of the MBS market --- arises when originators of mortgages that underlie the MBS no longer share in the prepayment risk of the securities, thereby increasing incentives to solicit refinancing activity. Therefore, Federal Reserve MBS holdings acquired from originators as a result of large-scale asset purchases can help stimulate economic activity through a so-called "solicited refinancing channel.'' Finally, we provide an estimate of the additional refinancing activity resulting from the solicited refinancing channel in the years after the Federal Reserve's first MBS purchase program, demonstrating that this channel conveyed savings on monthly mortgage payments to homeowners.

Rate-Related MBS Prepayment and Fallout Behavior Model with Quasi-Simulation and Empirical Restrictions

Prepayment behavior is traditionally a significant component of the MBS pricing and hedging models. Since U.S. financial crises of 2007-2009 highlighted the danger of the overreliance on the past experience, which may not be a proper indication of the future performance, there is a constant search of more relevant models aimed to overcome limitations of the historical analysis. We introduce the following innovation in the prepayment behavior forecasting: (a) combine empirical and theoretical approach to the forecasting, simulating the rate path, while predicting the target rate with an empirical model (b) introduce macro-variables into target rate forecast part of the analysis. We find that forecasting the mortgage rates with macro-variables is plausible in 1,3,6,9 and 12 month periods. We further establish methodology of the path forecasting and prepayment rates calculation based upon falling rate environment and rising rate environment examples. We observe interesting effects, suggesting high probability of loan fallout in the rising rate environment due to the intermediate rate fluctuations. We also notice signs of early determination of the fallout/prepayment decision. We suggest our finding are a promising addition to the established prepayment/fallout models.

Comparison of Fractional Model and Two Part Model for the Mortgage Risk Behaviours of Prepayment Assessment

This paper has debated between fractional and two part models in the context of prepayment behaviour, applications where a large proportion of zero observations are typically found. The predictive capacity in this paper is to provider the direction of consideration and very good fit result to the behaviours of prepayment for bank. From the perspective of practitioners, it could point of view the characteristics of borrowers of each variable would seem to be choosing in this paper. This paper also provides the simply looking at the extent to which policy decision of bank conclusions would differ depending upon the characteristics of customers’ behaviour consideration.

Prepayment behavior of China's mortgage borrowers: evidence from the loan‐level data

PurposeThere exists a large volume of literature evaluating the mortgage prepayment risk based on the USA's and other developed countries' experiences. With access to detailed loan‐level data provided by a national mortgage lender in China, the purpose of this paper is to revisit the empirical question of the determinants of mortgage prepayment probability.Design/methodology/approachThe paper utilizes unique loan‐level data from a large national residential mortgage lender in China to provide insights into borrowers' prepayment behavior in China under recent market conditions, focusing on the customers' behavior and the segmentation analysis of the prepayment risk.FindingsThe results from a logit model indicate that housing appreciation rate and the stock market performance are important considerations for Chinese borrowers. It was also found that borrowers show the heterogeneous prepayment behavior in different groups. For instance, households who purchase new houses are less sensitive to the LTV ratio. These findings provide empirical support for the risk management in the rapid growing mortgage market in China as well as those in other transitional economies.Research limitations/implicationsBecause of the lack of the literature in the immature mortgage markets, the research results may lack generalizability. Therefore, researchers are encouraged to test the proposed propositions further using their own datasets.Practical implicationsThe paper includes implications for policy makers to further strategic decision making using a quantitative framework which has not been fully developed in most of the state‐owned banks in China.Originality/valueThis paper has contributed to the analysis of Chinese mortgage prepayment pattern using a large recent micro‐loan level data set. As mortgage borrowers' behavior can be country specific due to the differences in housing policies and housing market structure, this paper sheds new light on the driver factors determining mortgage prepayment in China's mortgage market.

BG Banks Prepayment Model

In this paper BG Banks Danish MBB Prepayment modeling approach are being specified, estimated and validated.Prepayment modeling is not an exact science, like all model building it is a question of selection the most important factors that describe the evolution in the dependent variable - in this case the re-payment.When specifying our model, we decided to focus on the most important variables and the mechanism that underlies the prepayment behaviour - given our hypothesis. We defined this mathematically and estimated the unknown parameter vector - with the goal - of obtaining intuitive parameter values that supported our initial hypothesis regarding the nature of prepayment behaviour. In the paper it is shown that - as a general rule - our hypothesis about prepayment behaviour was supported. Furthermore, we obtained a degree-of-explanation equal to 79 for the estimation period 1995-2000.All in all we are very pleased with the obtained results. First of all they are intuive and secondly, the model gives a (very) satisfactory description of the actual historical re-payment pattern.