The Risk And Pricing Of Housing Mortgage Loan Securitization

Mortgage Backed Securitization(MBS), born in America, has been the most important financial innovation in the international finance within the recent several decades. It has extended the traditional credit chain , increased the liquidity of commercial banks, and provided a new way of raising funds for real estate market, so both real estate market and financial market can benefit from MBS. But longer credit chain contains more risk factors, complex process of securitization increases the uncertainty of income. Whether MBS increases the systematic risk to national economy is partly decided by whether the risk from MBS can be correctly priced. So when we focus on the benefit of MBS, risk and pricing study is more important.This paper analyzed the risk hide in China' s MBS based on China's national conditions, its basic asset and operation. The risk of China' s MBS can be divided into two parts, the risk of initial assets and the risk of securitization. The risk of initial assets include credit risk and prepayment risk. The risk of securitization include structural risk, legal risk and third-party risk. Prepayment is important to pricing MBS, so this paper gave a particular analysis of it.Chinese borrowers' prepayment features are different from foreign borrowers' , therefore measuring China's prepayment risk should not imitate foreign models. This paper analyzes the impact of China's prepayment, including interest rates, loan term, seasonal factors and the overall economic environment. The analysis revealed that changes in the borrower' s income level is the direct reason for China' s prepayment. According to the characteristics of Chinese borrowers, this paper proposes a theoretical prepayment model suited to China's national conditions. The borrowers spend a certain percentage of their income for housing expenses, the expenditure is divided into two parts. Some is used to repay the fixed monthly mortgage, then save the remainder for prepayment. When the saving is more than the minimum standards of prepayment, borrowers will prepay the loans. Therefore, we can calculate SMM and CPR through forecasting the borrowers' income.Mortgage-Backed Securities are bonds with options, so its theoretical price is different from the ordinary bonds. This paper proposes a pricing model suited to China's MBS, based on the theoretical analysis of price of MBS and pricing method of MBS. Finally based on China's prepayment model proposed in this paper, this paper simulated interest rate with Monte Carlo method and adopted OAS model to do a pricing simulation of China's MBS.