An Empirical Study of the Curtailment on a Bank's Mortgage Portfolio
Date Issued
2004
Date
2004
Author(s)
Wang, Perry
DOI
en-US
Abstract
This thesis researches the impact of mortgage curtailment behavior on the subsequent default probabilities. Almost all mortgage prepayment literature focus on the analysis of complete payoff. That is, when a borrower chooses to pay off the entire remaining balance of the mortgage by refinancing or as a result of the due-on-sale clause. Although curtailment is not popular in western countries, it is the dominant form of prepayment in Asia. Curtailment prepayment of a mortgage pool has very distinct implication on subsequent default probabilities than full prepayments. The literature documented the adverse impact of prepayment on the quality of the mortgages remain in a pool following a major refinancing opportunity. The rationale of this phenomenon is that the borrowers who can afford to refinance would have already done so; those borrowers remained in the pool tend to be the ones unable to refinance due to insufficient income or house value to qualify for a new mortgage. Curtailment, on the other hand, tends to have positive impact on the overall credit quality of a mortgage pool. With the reduction of remaining balance of individual loans, the average loan-to-value ratio decreases, making the loans less likely to experience negative equity. The fact that the borrower is able to pay extra amount indicates the excess repayment capacity, making ability to pay problem less a concern. Both situations lead to lower subsequent default rates.
Using a sample of over ten years mortgage performance records from a domestic bank, we studied the impact of curtailment on mortgage default risk. The results of the logistic regressions indicate that the cumulative curtailment is the most significant factor in predicting future default probabilities of a seasoned mortgage pool. This finding suggests that mortgage modeling in Taiwan would be very different from their western counter parties.
Using a sample of over ten years mortgage performance records from a domestic bank, we studied the impact of curtailment on mortgage default risk. The results of the logistic regressions indicate that the cumulative curtailment is the most significant factor in predicting future default probabilities of a seasoned mortgage pool. This finding suggests that mortgage modeling in Taiwan would be very different from their western counter parties.
Subjects
房屋貸款
投資組合
借款違約
部分提前還款
風險管理
提前還款
Prepayment
Mortgage
Default
Curtailment
Portfolio
Type
thesis
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