Study On Prepayment Penalty Of Residential Mortgages In China

Residential mortgage prepayment is the behavior that borrowers fail to make payments in accordance with the scheduled repayment plan, while choose to pay some or all of the loans outstanding before the maturity date. Currently prepayment risk has become an important kind of risk with which commercial banks are facing in risk management. Residential mortgage prepayment is not only directly affecting the profitability of commercial banks and increasing the difficulty of managing the matching of assets and liabilities, but also constraining the development of mortgage-backed securities. Therefore, in order to manage residential mortgage prepayment risk, some commercial banks begin to follow the experience of some foreign countries, they demand to receive a certain percentage of penalty from borrowers who conduct the prepayment. The action of these banks caused more and more heated social debate, the focus of debate lies in whether the prepayment penalty charge is reasonable and how to determine the appropriate prepayment penalty. Therefore, by studying the characteristics and influencing factors of resisential mortgage prepayment and learning experience from foreign countries, we can make reasonable explanations to the existence of residential mortgage prepayment penalty. Meanwhile, by building a theoretical model to determine an approapriate prepayment penalty, commercial banks can restrict the borrowers’ prepayment behavior without prejudice to the interests of them, at the same time commercial banks can well manage the prepayment risk they are facing.Based on the summarization and reorganization of previous literature on this topic, this paper does comprehensive and in-depth research of the characteristics and influencing factors of residential mortgage prepayment and explore the rationality of the prepayment penalty’s existence from jurisprudence and economics perspectives. Meanwhile, based on western classical economic theory, this paper analyzes the optimal decision behavior of commercial banks and borrowers in China residential mortgage market and builds constrained optimization models respectively. By studying the prepayment penalty determination of two types of residential mortgages (floating-rate and fixed-rate mortage), this paper established a general equilibrium analysis paradigm in prepayment market.Based on the conclusions of this study, the existence of a prepayment penalty system has certain theoretical and practical significances, and it is also an effective means of prepayment risk management for commercial banks under current conditions. Accordingly, this paper proposes some recommendations to improve the prepayment penalty system and other prepayment risk management measures in China.