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Abstract Because homeownership represents the largest investment many individuals make, and the credit risks of competing mortgage products are not well understood, we develop a framework to quantify absolute and [...]

Abstract: This paper studies the impact of mortgage curtailment behaviors on the subsequent default and prepayment performance. Although curtailment is not a popular event in the western countries, it is the dominant form of prepayment in Asia and other high saving rate regions. Using a sample of loan-level mortgage performance records from Taiwan, the results of the multinomial logit regressions indicate that curtailment is one of the most significant factors in predicting future default and prepayment probabilities of a seasoned mortgage pool. Mortgages with past curtailment are estimated to be 85% less likely to default and 23% more likely to prepay during the remaining life than a mortgage without any curtailment. Hence, ignorance of past curtailment records could lead to biased projection of default and prepayment and, hence, the pricing and hedging of a seasoned mortgage-backed security. By collecting and incorporating curtailment information, investors could more accurately estimate the fair market value, disclose risk-based capital, and perform effective hedging of a particular mortgage portfolio. [Copyright &y& Elsevier]

Abstract: The increasing use of securitized mortgage throughout the world has led to the creation of an asset class, the mortgage servicing right (MSR). The typical MSR used in the United States and Canada is a contract between the owners of a pool of residential mortgages and a financial institution under which the institution provides retail-level services to borrowers. This paper presents an options-based MSR valuation mode that incorporates both prepayment and default. Numerical results indicate that the MSR value is sensitive to interest rate and housing volatility parameters, as well as to the correlation coefficient between those parameters. [Copyright &y& Elsevier]