Characteristics of Mortgage Terminations: An Analysis on the Loan-Level Dataset
42 Pages Posted: 23 Nov 2016
Date Written: November 1, 2016
To valuate mortgage-backed securities, it is crucial to understand mortgage termination behavior. Analyzing the unique loan-level dataset, this study examines the characteristics of mortgage prepayment and default behavior in the Korean housing and housing finance markets. We find that loans to individuals with unhealthy financial characteristics — for example, a high loan-to-value ratio, a high debt-to-income ratio, a lower credit rate, or a high excess premium — have a higher prepayment risk in the Korean market, which contrasts with the findings on developed markets. The results of subsample tests across regions, loan purposes, and periods indicate that the prepayment risk in a high median price-to-income ratio region is sensitive to mortgage rates, whereas the prepayment risk in a low median price-to-income ratio region is sensitive to housing prices. Mortgages for purposes other than purchase or refinance are less sensitive to financial benefits in prepayment decisions. Prepayment and default behaviors have also changed over time.
Keywords: Default, Hazard model, Loan-level dataset, Mortgage; Prepayment
JEL Classification: G21, D12, R31
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