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Mortgage Curtailment and Default

Author

Listed:
  • Che-Chun Lin

    () (National Tsinghua University, 101, Sec. 2, Kuang-Fu Road, Hsin-Chu 30013, Taiwan)

  • Ting-Heng Chu

    () (Department of Economics, Finance, and Urban Studies, East Tennessee State University, Box 70686, Johnson City, TN 37614)

  • Larry J. Prather

    () (Department of Economics, Finance, and Urban Studies, East Tennessee State University, Box 70686, Johnson City, TN 37614)

  • Perry Wang

    () (Fubon Financial Holding Company, 3F 237 Section 1 Chien Kuo S. Road, Taipei 106, Taiwan)

Abstract

We explore the effect of mortgage curtailment payments on subsequent default probabilities. Although curtailment is not popular in western countries, it is the dominant form of prepayment in Asia. Using more than 6 years of mortgage performance records from an Asian bank, we investigate the impact of curtailment payments on mortgage default risk. The results of logistic regressions reveal that the cumulative curtailment is the most significant factor in predicting the future default probabilities of a seasoned mortgage pool. Thus, mortgage modeling for Asian countries should be different from mortgage modeling for western countries.

Suggested Citation

  • Che-Chun Lin & Ting-Heng Chu & Larry J. Prather & Perry Wang, 2005. "Mortgage Curtailment and Default," International Real Estate Review, Asian Real Estate Society, vol. 8(1), pages 95-109.
  • Handle: RePEc:ire:issued:v:08:n:01:2005:p:95-109
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    References listed on IDEAS

    as
    1. Chester Foster & Robert Van Order, 1985. "FHA Terminations: A Prelude to Rational Mortgage Pricing," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 13(3), pages 273-291, September.
    2. Deng, Yongheng, 1997. "Mortgage Termination: An Empirical Hazard Model with a Stochastic Term Structure," The Journal of Real Estate Finance and Economics, Springer, vol. 14(3), pages 309-331, May.
    3. Michael J. Brennan & Eduardo S. Schwartz, 1985. "Determinants of GNMA Mortgage Prices," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 13(3), pages 209-228, September.
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    5. Green, Jerry & Shoven, John B, 1986. "The Effects of Interest Rates on Mortgage Prepayments," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(1), pages 41-59, February.
    6. Dunn, Kenneth B & McConnell, John J, 1981. "Valuation of GNMA Mortgage-Backed Securities," Journal of Finance, American Finance Association, vol. 36(3), pages 599-616, June.
    7. Quigley, John M & Van Order, Robert, 1995. "Explicit Tests of Contingent Claims Models of Mortgage Default," The Journal of Real Estate Finance and Economics, Springer, vol. 11(2), pages 99-117, September.
    8. Peter Chinloy, 1993. "Elective Mortgage Prepayment: Termination and Curtailment," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 21(3), pages 313-332, September.
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    10. Kau, James B. & Keenan, Donald C. & Muller III, Walter J. & Epperson, James F., 1995. "The Valuation at Origination of Fixed-Rate Mortgages with Default and Prepayment," The Journal of Real Estate Finance and Economics, Springer, vol. 11(1), pages 5-36, July.
    11. Ambrose, Brent W & Buttimer, Richard & Thibodeau, Thomas, 2001. "A New Spin on the Jumbo/Conforming Loan Rate Differential," The Journal of Real Estate Finance and Economics, Springer, vol. 23(3), pages 309-335, November.
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    Citations

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    Cited by:

    1. McCollum, Meagan N. & Lee, Hong & Pace, R. Kelley, 2015. "Deleveraging and mortgage curtailment," Journal of Banking & Finance, Elsevier, vol. 60(C), pages 60-75.
    2. R. Kelley Pace & Shuang Zhu, 2016. "Inferring Price Information from Mortgage Payment Behavior: a Latent Index Approach," The Journal of Real Estate Finance and Economics, Springer, vol. 53(2), pages 246-267, August.

    More about this item

    Keywords

    housing policy in inflationary economies; civil servant’s wage-indexed payment mortgages (WIPMs);

    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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