The Model And Real Options Analysis Of The Prepayment Of Mortgage Loan

In China, since the house commercial process began at 1998, the mortgage loan becomes the most common payment method for the household, which is a loan based on the mortgage of the house bought by the borrower. In the duration of the contract of the mortgage loan, if the borrowers have enough money, they may choose to prepay to decrease the burden of the interest. The reasons why the borrowers choose to prepay are based on a variety of factors from interest rates of mortgage loan to the ability of prepayment. As mortgage prepayment phenomena increasingly occur, it has been received extensive attention in Chinese residential mortgage loan market.If the borrowers can get benefit, they will decide to prepay. But the behavior of prepayment is a kind of risk to the banks and increases the difficulty to evaluate mortgage-backed securities. So developing a good model is a central task in the evaluation of mortgage and MBS. Subsequently, the analysis and forecasting of the behavior of prepayment become more and more crucial.The paper is first provides the profit and loss valuation of the borrowers when they choose to prepayment by NPV method. Then a rational decision method was suggested to the decision-maker not only considering the float mortgage rate but also the invest cost of the borrowers. Correspondingly the penalty model which can be used by the banks to against the prepayment behavior was built. At last a computational examination was demonstrated under some assumptions.In chapter four, for the borrowers have the options to choose prepayment or not, the real-option model was used in this thesis to analyze the same questions as the first part. The approach of valuing the prepayment option is given in this part. The results which are educed by two methods are different, and the reasons why these result are not same are explained.The final part of the paper is served to show the applications of the model built by the real-option method and how to use the model to forecast the cash flow for the bank that issues mortgage loan contracts, and how to design the penalty if the banks want to have no loss when prepayment behavior occurs.