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Housing mortgage loan prepayment risk and its options Countermeasures

Author: GuoShengYong From: www.yourpaper.net Posted: 2007-11-21 16:26:32 Read:
Abstract: Through analysis of the economic losses of the three mortgage lenders prepayment bring the bank's net interest loss costs, service costs and management costs, to reveal the bank operating the housing mortgage business prepayment risk, and banks discussed the issue of the prepayment options "approach to guard against risks.

Keywords: housing mortgage loans; prepayment; risk; Options

Introduction [1]
With the central bank recently to adjust interest rates for housing mortgage loans, under the guidance of the "hike" signal, the early repayment of the idea has been lingering in the hearts of many of the world's loans to the public, workers, farmers, in built, cross-city commercial banks and a number of Bank in recent days to consult the public early repayment matters significantly increased.
Prepayment of housing mortgage loans, the borrower to repay some or all of the loan ahead of the agreed repayment deadline. Advance refers to the consent of the lender, the borrower on a monthly repayment methods modular repayment in a certain period, the early repayment of the remaining part of the proceeds upon the original interest rate and duration per annum and repayment; All advance to the borrower a one-time advance All the loan is repaid to the lender, this situation may occur in each period of individual housing mortgage loans segment actually shorten the term of the loan. The main reason people prepayment income levels rise, the economy's strength, increased repayment ability;; the statutory mortgage rates raised to reduce the burden of high long-term interest expense;, and for the lifting of the mortgage, as early as possible to get the "two certificates ", etc. [1]
The early repayment no doubt is an important form of active defaults. Well, the early repayment be bank to see what impact it, the bank should be how to deal with it? To address this issue, I will attempt to analyze the risk of early repayment bring the bank, and the bank with the option approach to prevent risks to explore.
Prepayment bring the bank's risk analysis
Prepayment occurs, the bank will therefore suffer the loss of interest, loss of service costs, and loss of management costs in three areas of risk.
2.1 equal monthly installments to pay early repayment under the conditions of the mortgage loan to bring the bank's loss of interest
Equal monthly installments to pay is the most commonly used method of repayment of housing mortgage loans, the article focuses on the early repayment bring the bank's loss of interest in this way. It can be proved that this method of repayment only early repayment of part of the money will affect the bank's interest income, the early repayment of the remaining part of the proceeds upon the original interest rate and duration of interest-bearing and repay bank interest income.
Individual housing mortgage loans early repayment, the bank's available funds will increase, but the reality of our resident deposits in the banking system balance high year after year, the bank has a large number of idle funds eager to find a way out, in this case customers early repayment of loans will only increase the bank the amount of idle funds, to increase the pressure and the risk of the bank's investment, even if the bank can this part of the early repayment of funds loaned out again, but this part of the funds actually squeeze bank original idle capital investment opportunities, the banks could have loaned out the original idle funds continue to idle. In fact, these are early repayment funds can not even bring bank minimum income according to the risk-free rate of return, and can only bring pure loss of interest to the bank.
Assumptions, the total amount of mortgage loans, the monthly interest rate, for a period of months; prepayment of $ () months to repay the bank the actual loss of interest on the present value of :
Maximum customers in time pay off the whole balance in the first month, calculated as follows:
At the end of the loan principal and interest and sinking fund factor: monthly repayment amount: ()
To the end of the month, has also amounts final value: (the final value of an ordinary annuity coefficient)
: The above analysis is based on China's banking system memory to make the actual situation of a large number of idle funds, but
Transition with the rapid development of China's market economy and consumer concepts as well as investment concepts, our society overall supply and demand of funds will gradually become more balanced and even a shortage situation, in this case, the housing mortgage loan prepayment bring banks the impact in relation to another matter, similar to the original mortgage loan interest rates or higher interest rates because the bank can easily this part of the early repayment of funds to re loaned out, so that the banks and not because the customer early repayment who have suffered losses, and it may therefore obtain higher yields.
Assume that, in this case, the bank interest rates then loaned out months, the bank's loss of interest can be analyzed as follows:
Because banks can always lowest yield --- Risk-free rate of return (that is the savings deposit rate) loaned out again, so the minimum value should be. Of course, the value of exactly equal, between and or greater than, may wish to set the maximum value for (its size roughly by the bank according to the capital supply and demand situation OK), then on to the closed interval [,] on a continuous variable, the function of the present value of the loss of bank interest should:
(When;, when)
The expected loss of bank interest:
= 2.2 service cost loss of service means the bank has to apply for the early recovery of the loan business increased by additional cost office expenses, customers early repayment of loans, banks are often unable to use computer processing vastly different circumstances, the only use of artificial human cost is very high, such costs are not recovered normal loans. Of course, in the case of banks to re-lend the banks in the lending process will produce more service costs.
This cost due process procedures of the bank office and standardization are relatively stable modest change with the change of external conditions, and is proportional to the number of early repayment, and advance repayments nothing to do, so the bank can ever office a value determined by the average of these costs required.
The 2.3 management cost loss management costs refers to the cost of funds banks need to increase due to the increase of the idle funds management. Management costs are also relatively stable.
Through the above analysis shows customer prepayment bring the total cost of the bank should be above three costs:
= / Where the cost of the loss of interest for the main part of the cost of services and management costs are relatively small.

3. prepayment risks Option solution
The early repayment of housing mortgage loans bring the risk to the bank, resulting in a loss. In a foreign country, the early repayment of housing mortgage loans as an important form of active breach to treat risk prevention issues have been the focus of attention of scholars. Kau and Keenan in 1995 in the areas of active breach creative way to introduce options; Schwartz and Torous (1993) analysis of the stop payment from a practical point of view also abandoned the prepayment option problem and measure the loss of this process; The recent years the, YonghengDeng Q uigley combined ceased making payments and advance payment, people decide whether to breach irrational pricing model, draw some valuable conclusions. [2] foreign banks to take a more in practice, a way to impose a "loan fee" or liquidated damages against prepayment risk. [3] currently only a few banks to take a symbolic response to receive a small percentage of the liquidated damages or fines, most banks do nothing, let the customers early repayment, far from forming a clear set of risk prevention mechanism, of course, with the current regulations content gaps and contradictions in this regard is also inseparable.
Banks charge penalties or fines are passive against prepayment risk, bank liquidated damages or fines proportion determined for each prepayment customers according to customers' different situations and different ways of prepayment, which increased the amount of the bank's services, resulting in the loss of additional service costs;, customers tend to bank charge penalties or fines as an unfriendly approach, which makes the bank inadvertently offended some customers, which virtually will form a loss of the bank. If banks through Options Exchange or other intermediaries outside the American "issue a prepayment option, customers buy such options contracts in together before the expiration of the rights of any prepayment January, but did not buy in advance settled options contracts, clients will not be allowed to pay in advance, then the Bank of prepayment risk prevention from passive to active, the transfer of risk to the secondary market, many investors dispersed.
3.1 prepayment option issue price determination
The price of the option is also known as royalty, the purchaser of an option to acquire the rights fees paid to the seller. The price of an option is mainly constituted by the intrinsic value and time value of embedded value is available when the option buyer immediately fulfill contract revenue, the time value of the option seller for the screening of the risks of options trading period of time, for the buyer to reflect the options embedded value the possibility to add value in the future. [4]
For the purpose of the prepayment option, its intrinsic value is the buyer (prepayment customers) immediately to fulfill the contract (ie prepayment) interest savings income, at the same time, this is precisely the loss of interest this time banks; their The time value of future interest rates by raising the possibility of prepayment customers connotation value added, prepayment so that the possibility of the increase in interest savings, of course, which in turn increase the likelihood of loss of bank interest. Bank issued prepayment options in order to guard against the risk of prepayment brought, so the issue price of the prepayment option theory should be able to make up the sum of the cost of bring bank prepayment, that should include interest costs (embedded value ), time costs, service costs, and management costs, namely:
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