Advertisement

The Journal of Real Estate Finance and Economics

, Volume 57, Issue 4, pp 647–676 | Cite as

Characteristics of Mortgage Terminations: an Analysis of a Loan-Level Dataset

  • Hyeongjun Kim
  • Hoon Cho
  • Doojin Ryu
Article

Abstract

Understanding mortgage termination behavior is crucial for valuating mortgage-backed securities. Analyzing a unique loan-level dataset, this study examines the characteristics of mortgage prepayment and default behaviors in the Korean housing and housing finance markets. We also analyze mortgage termination behaviors across regions, loan purposes, and periods. The results suggest that the prepayment rate of fixed-rate mortgages (FRMs) and the ratio of adjustable-rate mortgages to FRMs can provide meaningful signals for the Korean household economy. Although the macro-prudential policies pertaining to the loan-to-value ratio (LTV) and debt-to-income ratio (DTI) are very effective, their effects can vary depending on the region or loan purpose. Furthermore, the DTI and credit score cannot always identify the default risks of mortgages not intended for housing purchases even though such mortgages are more vulnerable to macroeconomic changes. The observed changes in default behavior indicate that the government’s policies to promote fixed-rate loans have achieved a certain degree of success.

Keywords

Default Hazard model Loan-level dataset Mortgage Prepayment 

JEL Classification

D12 G21 R31 

References

  1. Agarwal, S., Green, R. K., Rosenblatt, E., & Yao, V. (2015). Collateral pledge, sunk-cost fallacy and mortgage default. Journal of Financial Intermediation, 24(4), 636–652.CrossRefGoogle Scholar
  2. Agarwal, S., Ben-David, I., & Yao, V. (2017). Systematic mistakes in the mortgage market and lack of financial sophistication. Journal of Financial Economics, 123(1), 42–58.CrossRefGoogle Scholar
  3. Alexander, W. P., Grimshaw, S. D., McQueen, G. R., & Slade, B. A. (2002). Some loans are more equal than others: Third–party originations and defaults in the subprime mortgage industry. Real Estate Economics, 30(4), 667–697.CrossRefGoogle Scholar
  4. An, X., Clapp, J. M., & Deng, Y. (2010). Omitted mobility characteristics and property market dynamics: Application to mortgage termination. Journal of Real Estate Finance and Economics, 41(3), 245–271.CrossRefGoogle Scholar
  5. An, X., Deng, Y., & Gabriel, S. A. (2011). Asymmetric information, adverse selection, and the pricing of CMBS. Journal of Financial Economics, 100(2), 304–325.CrossRefGoogle Scholar
  6. An, X., Deng, Y., Rosenblatt, E., & Yao, V. W. (2012). Model stability and the subprime mortgage crisis. Journal of Real Estate Finance and Economics, 45(3), 545–568.CrossRefGoogle Scholar
  7. Archer, W. R., Ling, D. C., & McGill, G. A. (1996). The effect of income and collateral constraints on residential mortgage terminations. Regional Science and Urban Economics, 26(3), 235–261.CrossRefGoogle Scholar
  8. Archer, W. R., Ling, D. C., & McGill, G. A. (1997). Demographic versus option-driven mortgage terminations. Journal of Housing Economics, 6(2), 137–163.CrossRefGoogle Scholar
  9. Bennett, P., Peach, R., & Peristiani, S. (2001). Structural change in the mortgage market and the propensity to refinance. Journal of Money, Credit and Banking, 33(4), 955–975.CrossRefGoogle Scholar
  10. Calhoun, C. A., & Deng, Y. (2002). A dynamic analysis of fixed-and adjustable-rate mortgage terminations. Journal of Real Estate Finance and Economics, 24(1), 9–33.CrossRefGoogle Scholar
  11. Campbell, T. S., & Dietrich, J. K. (1983). The determinants of default on insured conventional residential mortgage loans. Journal of Finance, 38(5), 1569–1581.CrossRefGoogle Scholar
  12. Capozza, D., Kazarian, D., & Thomson, T. A. (1997). Mortgage default in local markets. Real Estate Economics, 25(4), 631–655.CrossRefGoogle Scholar
  13. Cho, H., Kim, K.-H., & Shilling, J. D. (2012). Seemingly irrational but predictable price formation in Seoul’s housing market. Journal of Real Estate Finance and Economics, 44(4), 526–542.CrossRefGoogle Scholar
  14. Clapp, J. M., Goldberg, G. M., Harding, J. P., & LaCour-Little, M. (2001). Movers and shuckers: Interdependent prepayment decisions. Real Estate Economics, 29(3), 411–450.CrossRefGoogle Scholar
  15. Collin-Dufresne, P., & Harding, J. P. (1999). A closed form formula for valuing mortgages. Journal of Real Estate Finance and Economics, 19(2), 133–146.CrossRefGoogle Scholar
  16. Demyanyk, Y., & van Hemert, O. (2009). Understanding the subprime mortgage crisis. Review of Financial Studies, 24(6), 1848–1880.CrossRefGoogle Scholar
  17. Deng, Y., & Gabriel, S. (2006). Risk-based pricing and the enhancement of mortgage credit availability among underserved and higher credit-risk populations. Journal of Money, Credit, and Banking, 38(6), 1431–1460.CrossRefGoogle Scholar
  18. Deng, Y., Quigley, J. M., & van Order, R. (2000). Mortgage terminations, heterogeneity and the exercise of mortgage options. Econometrica, 68(2), 275–307.CrossRefGoogle Scholar
  19. Deng, Y., Pavlov, A. D., & Yang, L. (2005). Spatial heterogeneity in mortgage terminations by refinance, sale and default. Real Estate Economics, 33(4), 739–764.CrossRefGoogle Scholar
  20. Dickinson, A., & Heuson, A. J. (1993). Explaining refinancing decisions using microdata. Real Estate Economics, 21(3), 293–311.CrossRefGoogle Scholar
  21. Elul, R. (2016). Securitization and mortgage default. Journal of Financial Services Research, 49(2–3), 281–309.CrossRefGoogle Scholar
  22. Giliberto, S. M., & Thibodeau, T. G. (1989). Modeling conventional residential mortgage refinancings. Journal of Real Estate Finance and Economics, 2(4), 285–299.CrossRefGoogle Scholar
  23. Green, R. K., & LaCour-Little, M. (1999). Some truths about ostriches: Who doesn’t prepay their mortgages and why they don’t. Journal of Housing Economics, 8(3), 233–248.CrossRefGoogle Scholar
  24. Green, J., & Shoven, J. B. (1986). The effects of interest rates on mortgage prepayments. Journal of Money, Credit and Banking, 18(1), 41–59.CrossRefGoogle Scholar
  25. Hendershott, P. H., & Schultz, W. R. (1993). Equity and nonequity determinants of FHA single-family mortgage foreclosures in the 1980s. Real Estate Economics, 21(4), 405–430.CrossRefGoogle Scholar
  26. Hull, J.C. (2015). Options, futures and other derivatives, 9th edition, University of Toronto, Pearson.Google Scholar
  27. Hwang, M., Quigley, J. M., & Son, J. (2006). The dividend pricing model: New evidence from the Korean housing market. Journal of Real Estate Finance and Economics, 32(3), 205–228.CrossRefGoogle Scholar
  28. Kelly, A. (2008). “Skin in the game”: Zero downpayment mortgage default. Journal of Housing Research, 17(2), 75–99.Google Scholar
  29. Keys, B. J., Mukherjee, T., Seru, A., & Vig, V. (2010). Did securitization lead to lax screening? Evidence from subprime loans. Quarterly Journal of Economics, 125(1), 307–362.CrossRefGoogle Scholar
  30. LaCour-Little, M., Rosenblatt, E., & Yao, V. (2010). Home equity extraction by homeowners: 2000–2006. Journal of Real Estate Research, 32(1), 23–46.Google Scholar
  31. Lin, Z., Rosenblatt, E., & Yao, V. (2009). Spillover effects of foreclosures on neighborhood property values. Journal of Real Estate Finance and Economics, 38(4), 387–407.CrossRefGoogle Scholar
  32. Longstaff, F. A. (2010). The subprime credit crisis and contagion in financial markets. Journal of Financial Economics, 97(3), 436–450.CrossRefGoogle Scholar
  33. Mattey, J., & Wallace, N. (2001). Housing-price cycles and prepayment rates of US mortgage pools. Journal of Real Estate Finance and Economics, 23(2), 161–184.CrossRefGoogle Scholar
  34. Nakagami, Y., & Pereira, A. M. (1991). Housing appreciation, mortgage interest rates, and homeowner mobility. Journal of Urban Economics, 30(3), 271–292.CrossRefGoogle Scholar
  35. Pavlov, A. D. (2001). Competing risks of mortgage termination: Who refinances, who moves, and who defaults? Journal of Real Estate Finance and Economics, 23(2), 185–211.CrossRefGoogle Scholar
  36. Pennington-Cross, A. (2003). Credit history and the performance of prime and nonprime mortgages. Journal of Real Estate Finance and Economics, 27(3), 279–301.CrossRefGoogle Scholar
  37. Phillips, R. A., Rosenblatt, E., & VanderHoff, J. H. (1996). The probability of fixed-and adjustable-rate mortgage termination. Journal of Real Estate Finance and Economics, 13(2), 95–104.CrossRefGoogle Scholar
  38. Quigley, J. M. (1987). Interest rate variations, mortgage prepayments and household mobility. Review of Economics and Statistics, 69(4), 636–643.CrossRefGoogle Scholar
  39. Rajan, U., Seru, A., & Vig, V. (2010). Statistical default models and incentives. American Economic Review, 100(2), 506–510.CrossRefGoogle Scholar
  40. Richard, S. F., & Roll, R. (1989). Prepayments on fixed-rate mortgage-backed securities. Journal of Portfolio Management, 15(3), 73–82.CrossRefGoogle Scholar
  41. Ryu, D. (2016). Considering all microstructure effects: The extension of a trade indicator model. Economics Letters, 146, 107–110.CrossRefGoogle Scholar
  42. Ryu, D., Ryu, D., & Hwang, J. H. (2017). Corporate governance, product-market competition, and stock returns: Evidence from the Korean market. Asian Business & Management, 16(1–2), 50–91.CrossRefGoogle Scholar
  43. Shim, H., Kim, H., Kim, S., & Ryu, D. (2016). Testing the relative purchasing power parity hypothesis: The case of Korea. Applied Economics, 48(25), 2383–2395.CrossRefGoogle Scholar
  44. Song, J., & Ryu, D. (2016). Credit cycle and balancing the capital gap: Evidence from Korea. Economic Systems, 40(4), 595–611.CrossRefGoogle Scholar
  45. Stanton, R. (1995). Rational prepayment and the valuation of mortgage-backed securities. Review of Financial Studies, 8(3), 677–708.CrossRefGoogle Scholar
  46. Vandell, K. D. (1995). How ruthless is mortgage default? A review and synthesis of the evidence. Journal of Housing Research, 6(2), 245–264.Google Scholar
  47. von Furstenberg, G. M. (1969). Default risk on FHA-insured home mortgages as a function of the terms of financing: A quantitative analysis. Journal of Finance, 24(3), 459–477.CrossRefGoogle Scholar
  48. von Furstenberg, G. M. (1970a). Interstate differences in mortgage renting risks: An analysis of causes. Journal of Financial and Quantitative Analysis, 5, 229–242.CrossRefGoogle Scholar
  49. von Furstenberg, G. M. (1970b). The investment quality of home mortgages. Journal of Risk and Insurance, 37(3), 437–445.CrossRefGoogle Scholar
  50. von Furstenberg, G. M., & Green, R. J. (1974). Home mortgage delinquencies: A cohort analysis. Journal of Finance, 29(5), 1545–1548.CrossRefGoogle Scholar
  51. Williams, A. O., Beranek, W., & Kenkel, J. (1974). Default risk in urban mortgages: A Pittsburgh prototype analysis. Real Estate Economics, 2(2), 101–112.CrossRefGoogle Scholar
  52. Yang, H., Choi, H.-S., & Ryu, D. (2017a). Option market characteristics and price monotonicity violations. Journal of Futures Markets, 37(5), 473–498.CrossRefGoogle Scholar
  53. Yang, H., Ahn, H-.J., Kim, M.H., & Ryu, D. (2017b). Information asymmetry and investor trading behavior around bond rating change announcements. Emerging Markets Review, forthcoming.Google Scholar
  54. Yang, E., Kim, S., Kim, M.H., & Ryu, D. (2017c). Macroeconomic shocks and stock market returns: The case of Korea. Applied Economics, forthcoming.Google Scholar

Copyright information

© Springer Science+Business Media, LLC 2017

Authors and Affiliations

  1. 1.Korea Housing Finance CorporationBusanRepublic of Korea
  2. 2.College of BusinessKorea Advanced Institute of Science and Technology (KAIST)SeoulRepublic of Korea
  3. 3.College of EconomicsSungkyunkwan University (SKKU)SeoulRepublic of Korea

Personalised recommendations