A Regional Comparison of the Factors of Mortgage Default and Prepayment in Korea
Doo Won Bang
Sae Woon Park
Yun W. Park
The purpose of this study is to identify the economic factors that play major roles in determining the default and the prepayment risks in Korea. While the house price has risen steeply in Seoul while it has dropped in Busan, the default rate in Busan is higher than in Seoul, We also find that the defaults in Seoul are concentrated in the first one year of the mortgage origination suggesting the possibility of speculation and/or excessive amount leverage in Seoul. The default rate of the Korean market is 0.78%, which is relatively low and the prepayment rate is 20.06%, which is relatively high. We find that the CDR(conditional default rate) and the CPR(conditional prepayment rate) are similar in shape to the SDA and PSA model for the US mortgages and the estimated CDR of the Korean mortgages is approximately 50-100% SDA and the estimated CPR is approximately 150-200% PSA. We find that the default is highly sensitive to the past house price changes, LTV, credit rating, borrower age and income. The prepayment is influenced by LTV, DTI, borrower age and income. The regional difference is limited.
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