Studies On The Personal Housing Mortgage Loans Prepayment Of Commercial Banks

China’s economy experienced a process of changing from planned economy to socialist market economy, therefore, the economic systems of most departments have such a feature of gradually transforming from completely administrative-type to administrative-type and commercial-type in parallel. Housing finance system has also gone through this evolution, from the full housing allocation policy to the combination of the Mandatory Provident Fund system and the commercial individual housing loans, to the current situation of commercial individual housing loans being leading role. Since the state opened the individual housing consumer credit market in 1998, personal housing mortgage loans have grown fast. The proportion of personal housing mortgage loans accounting for the balance of loans of financial institutions increased from 0.49% in 1998 to 9.82% in 2008.The rapid expansion must be accompanied by the accumulation of risk. When the risk stimulus occurs, the risk will break out intensively. In the rate-hike-cycle between 2004 and 2007, People’s Bank of China raised the benchmark interest rate eight times, causing the Adjustable-Rate Mortgages’cost increase. Borrowers’ repayment burdened, and the number of borrowers who chose to prepay increased sharply, leading to a "prepayment boom". A large number of prepayments had a significant adverse impact on commercial banks. It directly resulted the decrease of interest income and the loss of cost. As the domestic commercial banks focused only mortgage credit risk and operational risk, little attention to prepayment risk, in the face of "repayment boom", they were caught off guard. They hastily introduced the prepayment penalty measures, which caused a big controversy in the community. In this context, the domestic academia and practitioners started to concern the prepayment risk, and increased research and management efforts. Since October 2010, China has raised interest rate four times. It means we have entered a new rate-hike-cycle, which will increase the degree of prepayment risk. The "prepayment boom" is likely to appear again as the last round of rate hikes. If the commercial banks have not prepared well or effectively manage the prepayment risk, the outbreak of prepayment risk will cause a significant loss.In the aforementioned context, this paper makes a subject to study mortgage and its prepayment. On the basis of the theoretical and empirical research, it will discuss the prepayment risk management ideas and concrete measures, hoping to cause banks to pay attention to prepayment risk and provide some useful reference on prepayment risk management.This study follows the route:first, mortgage study, then the mortgage prepayment behavior study; first, ask questions, analyze problems, then solve the problem; theoretical research first, empirical research later. Through a combination of qualitative and quantitative research, the main conclusions of the text are as follows:1. After experiencing three stages, simple experience and practice research stage, theoretical research stage, and theoretical and empirical research combining stage, foreign mortgage prepayment research is very mature and fruitful. In contrast, domestic research is still in the initial stage of learning from overseas, practitioners start to pay more and more attention to the risk of prepayment, and apply some home and abroad research results to guide practice. As China’s mortgage market continues to mature, the study of the prepayment will continue to deepen.2. The U.S. mortgage market is the world’s most mature market, mainly for diversification of product range, flexibility of product pricing; market segmentation and specialization; rationalization of market structure and high market efficiency. China’s housing mortgage loan market is still in the stage of rapid development, existing many shortcomings. U.S. mortgage product design and pricing, and some of the designs of market mechanisms are meaningful to China.3.Mortgage prepayment has a wide range of adverse impacts on Commercial banks. Domestic banks should attach importance to prepayment risk. There are many determinants of prepayment behavior, generally can be classified into five categories, loans feature, housing feature, borrower characteristics, economic characteristics and other factors. Therefore, prediction of the prepayment rate is very complex. 4.Compared to foreign, there are some unique features of domestic mortgage prepayments, mainly the different motives for prepayment. Domestic borrowers don’t like getting into debt under the impact of traditional concept. If there is capacity to pay, or be stimulated by other factors, the borrower will prepay the mortgage. In China, the "Loan repayment by loan" of the refinancing prepayment is explicitly limited.5.The conclusions of empirical research on prepayment samples from a state-owned bank in Chengdu as follows:young people’s tendency to prepay is weaker than that of the middle-aged with better economic base; married borrowers’ prepayment probability is bigger; education and income level have a positive relationship with prepayment tendency. "Absolute value of spread","LTV","loan period", "area", "loan amount"and "family income" variables significantly affect the dependent variable "prepayment time point". The coefficients of "absolute value of spread" and "loan amount" are negative, indicating that the greater interest rate stimulation and the larger the loan amount, the earlier time to prepay, corresponding to the shorter duration of the loan. Other variables and "prepayment time point" change in the same direction, the greater the value of the corresponding variables, the later time point of prepayment.6.Domestic banks’prepayment risk management is relatively backward, management measures are mostly feedback control, lack of prior restraint and control during the event; lack of a unified understanding and management regulations among banks; lack of quantitative management techniques, still in initial management phase of experience research and subjective judgement.7.On the basis of theoretical and empirical research, referring to the advanced experience from abroad, this paper proposes comprehensive ideas and specific measures of prepayment risk management, including the prior restraint, control during the event and feedback control, specifically including:market and customer segmentation; product design flexibility and diversification; following the principles of price risk coverage, product pricing flexibility; improving the housing mortgage market; establishing a sound mechanism to guarantee mortgages for people of different income groups; prepayment risk management ideas based on Prepayment Yield; establishing a scientific and rational system of prepayment penalty; establishing a sound and scientific mortgage database; flexible use of off-balance and on-balance sheet hedging and accelerating the establishment and improvement of the secondary market.The main contributions of this paper are as follows:1.Make mortgage products studies as the paper’s breakthrough point, including product design, pricing and other micro-mechanism, which lays the theoretical foundation for the subject of this thesis-prepayment behavior and provides ideas for the policy recommendations. This line of thought follows the study logic of mortgage loans first and mortgage prepayment second. To some extent, it makes up for the study blankness of studying the prepayment from mortgage products’micro-mechanism.2.Establish the Prepayment Time Point Forecasting Model on base of empirical analysis of mortgage prepayment samples from a state-owned bank in Chengdu. Contrast to the Prepayment Rate Forecasting Model, the Prepayment Time Point Forecasting Model can help banks to predict the time point of risk occurring after identifying the specific prepayment risk of the borrowers, which can promote banks’effective risk management.3.Apply the fixed-income securities theory to establish Prepayment Yield Model between banks and their customers, providing banks’prepayment risk management with a new idea.The empirical analysis part of this paper doesn’t further establish the prediction model of prepayment rates as a result of the absence of collection to the normal-repayment-mortgage samples data. Information of samples collected is also limited, which has a certain bad impact on the accuracy of the empirical results. Those above-mentioned are some shortages of this paper.