The Risk And Valuation On The Mortgage-Backed Security In China

Mortgage securitization is one of the most important financial innovations of the last century. It will be less liquid, but with a more stable future cash income for the mortgage re-mortgage pools, through certain technical processing, be converted into financial markets in the process of securities in circulation. As new financial instruments, mortgage securitization investment choices can enrich and increase the number of financial transactions, expanding the contents of financial transactions, re-allocation of financial resources and improve risk allocation Therefore, MBS has been developing rapidly over the past few decades and much welcomed by the investors. On December15,2005, China Construction Bank successfully issued the first branch of mortgage-backed securities, beginning the securitization of housing mortgage loans in the prologue. However, because domestic investors are not familiar with MBS and what’s more, because of technical limitations and other reasons, being difficult to accurately predict future cash flows MBS, MBS is difficult to determine the price of science, so the transaction is not very active. Because China’s housing mortgage-backed securities not only in theory but also in practice, there is a certain lack of research. This paper intends to research mystically on mortgage-backed securities like risk characteristics, pricing principles and methods to promote the mortgage-backed securities in C hina further development.In the U.S., most mortgages have fixed rates. Because there is government guarantees and no breach of contract and even the market interest rate is lower than the contract interest rate, the borrower usually can also easily refinance the original mortgage loans prepayment, Therefore MBS cash flow analysis is in fact the analysis of cash flow to prepayments, the problem looks very simple. In China, personal housing mortgage loans are mostly floating rate ones, the contract interest rate links with market interest rate, there is no government guarantee and so there is a risk of default. What is more important is that difficult for the borrower to obtain refinancing even if the borrower should be based on option theory prepayment, but without sufficient funds is also difficult to achieve. In fact, our borrowers have a profound root of’out of debt, out of danger’, the main source of funding for payment in advance is their accumulation in this sense, the loan repayment behavior more like a traditional "consumer" behavior. Based on this basic idea, the paper launched a cash flow and pricing of MBS research.This paper introduces the background, definitions and principles of the mortgage securitization; according to the differences of product structures, the MBS are divided into mortgage pass through securities, mortgage backed bonds and collateralized mortgage obligation. And we make a comparison for the characteristics of three types of securities.In addition the securitization of mortgage product features are described.Then we made a comprehensive research and discussion on the risk of default and prepayment involved on housing mortgage backed securities risk and pricing processes, focused on analyzing the default risk and prepayment risk of various factors, introduced and compared default prepayment risk of common statistical models like proportional hazards models and options theory to the optimization models.In this paper, CIR model, Vasicek model and other classical model of the term structure are summarized, and then the mortgage-backed securities pricing methods (static cash flow yield, static spread, simulation interest rate, the refinancing threshold pricing), pricing model (actuarial model, structured model, reduced-form model) and solution method (analytical method, numerical method) were compared to analyze their respective advantages and disadvantages.According to the actual situation in our country, defined λ for payment rate, which λ>0means prepayment rate, λ<O says default rate. To maximizing the assets value of the mortgage borrowers, a dynamic optimization model of payment rate for the contract period is employed by means of Hamilton principle of analytical solutions. The theoretical analysis of the borrower’s optimal payment strategy shows that prepayment rates based on the option theory are not the global optimum. The borrower’s optimal decision is not only correlated with the contemporary house prices, interest rates, income that are all exogenous factors, but also with the borrower’s decisions in the past and in the future related. In addition, from the economic background, influence factors, and so-called the "anomaly" in recent years the solutions of dynamic optimization model and options theory are compared and we found the dynamic optimization payment model is more suited and applicable to the economic situation and influential factors in China, and also gives the "anomaly" a reasonable explanation.On the basis of theoretical analysis, with the first team of housing mortgage-backed securities "jianyuan-2005" as the research object, the influence factors of dynamic payment model preliminary validation. Using multiple regression method, from interest rates and house prices, income, capital market macro perspective brought to the analysis of the asset pool the influence factors of default rates. Research found that the longer, house prices account age, loan default rate lower and higher; contract rates increase, capital market extreme value presence would lead to the default rate; In addition, the higher the advancements default rate, this default rate is usually higher; Without considering the premise of previous default rate, net income growth can markedly reduce the default rate. Integrated with the multiple regression, semi-parametric regression and threshold regression methods to analyze the influence factors of prepayment rates of the asset pool, research found that long-term mortgage rates has positive correlation with the prepayment rate; The cumulative amount of prepayment and prepayment rates of relationship between the quadratic function; the prepayment rate has positive correlation with capital market return and house prices, The average monthly return on capital market, over the past two months, than the single return on capital to better reflect the changes. By some factors, borrowers don’t usually will’s year-end (February) big net income payments, and immediately used in advance will hold a while, until April until it eventually released the money used to advance payments.Based on the analysis of default and prepayment, the paper analyzes the cash flow of asset pool, and builds the MPT pricing model containing prepayment and default. A case study in’jianyuan-2005", we use Monte Carlo simulation prepayment rates, default rates, principal and interest cash flow, use China’s national debt yield curve to simulate the pricing of assets pool, and the study found that the average price of the assets pool is9,218,409,240Yuan.