Mortgage Prepayment Research At Current Interest Rate System

During 2007-2008, with the adjustment of Benchmark interest-rate of loan by the PBOC, mortgage prepayments significantly increased, which upset the funds utilization of the bank. A new risk aroused. For that, some banks charged penalty for prepayment in different ratio. However, this had caused great repercussions in society which focused on the reasonableness ratio and the property and others. Generally believed that the prepayment has an important relationship with the interest rate volatility, so with the current monetary policy gradually tight, we should pay attention to mortgage prepayment and the risk of subsequent.This article mainly divided into two parts:The one is the establishment of model between prepayments and penalty ratio. For individual borrowers (consumers), they pursue the maximization of utility which will be inevitably affected by the penalty ratio. Borrowers weigh the overall effect to reach a advance prepayment amount, which is the demand of prepayment market; On the other hand, the banks supply mortgage loans to pursue the maximized profits at certain risks, but prepayment will decrease the interest income. So, penalty would compensate interest loss for some extent. Risk is natural. From above two aspects, there will be a satisfied balance between demand and supply, which can also be bases for penalty pricing. The other part:Analysing a case study of a commercial bank loans, we can get the evaluation of its penalty level and the factors that influence prepayment. At the same time, we give some constructive comments and proposals on risk management for commercial banks and borrowers.This article is divided into six chapters. The first one describes the background, significance of issues and literature review. Facing a new round of rate hikes expected, we will stimulate the occurrence of prepayment. The second chapter gives the status of mortgage prepayment, including reasons, effects. The third chapter gives an equilibrium model with the basis of economic hypothecs. There will be overall efficiency loss in non-equilibrium state, and in theory there is a balanced level of penalty that makes it to be utility maximization. The fourth chapter gives three representative cases of prepayment to imply the factors. Prepayment needs enough economic ability and willingness, and mortgage prepayment exist a necessity. The fifth chapter gives some recommendations for lenders and borrowers. Reasonable penalty pricing can promote the realization of market equilibrium and social welfare maximization. As lender, the bank can shift the risk by asset securitization and other methods to achieve risk-sharing, at the same time, the borrower should choose prepayment rationally and economically. The last chapter gives the lack for improvement.The following are innovations. First of all, this topic is from my internship in the Bank of Communications. I collected a certain number of cases of prepayment by questionnaires survey, consulting reference source and research data, etc, and then the three representative cases were chosen to show the practical problems with the actual meaning. Secondly, standing in a neutral point of view, this article analyzes the prepayment of the borrower and lender, to provide suggestions for both. It takes into account the interests of all parties to evaluate the social welfare with economic behavior and economic decision-making. Finally, this paper suggests the floating penalty rate, which can be linked with the market interest rate and other factors. Fixed-rate mortgage loan contract can also be launched to manage prepayment risk.