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Mortgage Prepayment and Default Behavior with Embedded Forward Contract Risks in China’s Housing Market

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dc.contributor.authorDeng, Yongheng
dc.contributor.authorLiu, Peng
dc.date.accessioned2020-09-12T21:13:31Z
dc.date.available2020-09-12T21:13:31Z
dc.date.issued2009-04-29
dc.description.abstractMost condominiums in China are sold forward on a pre-sale market, where purchasers and developers transact on an underlying property that is not yet completed. During the pre-sale period home buyers face a significant forward contract risk. However, home buyers can borrow mortgages from banks so that they can effectively share the forward contract risk with banks. This explains the phenomenon of irregularly high early-stage default and prepayment rates observed in residential mortgage lending in China, where there are few, if any, financial incentives for mortgage borrowers to exercise either put or call options. Mortgages collateralized by forward housing assets are riskier than are those with underlying assets traded on the spot market. However, currently Chinese mortgage banks charge the same rate to all mortgage borrowers. This inefficiency in risk sharing between mortgage borrowers’ groups in the forward and spot housing markets leads to mispricing in secondary mortgage sales and mortgage-backed security trading.
dc.description.legacydownloadsPL13_Mortgage_prepayment_.pdf: 217 downloads, before Aug. 1, 2020.
dc.identifier.other10501072
dc.identifier.urihttps://hdl.handle.net/1813/72421
dc.language.isoen_US
dc.relation.doihttps://doi.org/10.1007/s11146-008-9151-1
dc.rightsRequired Publisher Statement: © Springer. Final version published as: Deng, Y., & Liu, P. (2009). Mortgage prepayment and default behavior with embedded forward contract risks in China’s housing market. Journal of Real Estate Finance and Economics, 38(3), 214-240. doi: 10.1007/s11146-008-9151-1 Reprinted with permission. All rights reserved.
dc.subjectmortgage
dc.subjectprepayment
dc.subjectdefault
dc.subjectcredit risk
dc.subjectforward contract
dc.subjectpre-sale
dc.titleMortgage Prepayment and Default Behavior with Embedded Forward Contract Risks in China’s Housing Market
dc.typearticle
local.authorAffiliationDeng, Yongheng: University of Southern California
local.authorAffiliationLiu, Peng: pl333@cornell.edu Cornell University School of Hotel Administration

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