ریسک پیش پرداخت ساختاری ریسک های اساسی برای بیمه زندگی مسکونی در یک بازار در حال توسعه

Since 1998 all residential mortgages in China have been adjustable rate mortgages (ARMs). However, the borrower’s motivation for prepayment is different from that in the US or other developed mortgage markets. In the US, mortgage insurance plays an imperative role in covering some of the risk typically faced by housing finance institutions. However, China’s residential mortgage life insurance (RMLI) market is in its infancy. It offers the insured mortgagor a life-insurance death benefit, arising from only illness or accident, settling the insured’s outstanding residential mortgage balance. Prepayments of some RMLIs’ underlying mortgages are observed, leading to a premature termination of both the residential mortgage and the insurance commitment to settle the outstanding mortgage balance even though the insured has not yet passed away. Because such prepayments significantly influence the pricing of the RMLI, it is imperative to know more about the prepayment rate of occurrence and the prepayment characteristics of the underlying residential mortgages in terms of observable macro economic factors, loan specific factors and borrower specific characteristics. Hence, this study investigates the prepayment risk behavior of the underlying mortgages for RMLIs, utilizing a pilot study of 1000 Shanghai residential mortgagors who took up RMLIs between January 1999 and December 2003. This study uses the Cox proportional hazard model to investigate RMLI-mortgage prepayment risk behavior. The resultant hazard rate is dependent on four primary factors: combined monthly income of the co-borrowers, growth in the gross domestic product, number of co-borrowers and initial loan-to-value ratio.

The residential mortgage market has rapidly developed in China since 1998, when the State Council of the People’s Republic of China introduced several administrative laws to broaden housing reform and expedite housing construction. Residential mortgage lending has thus accelerated since 1998 in line with reforms aimed at ending the state-controlled welfare-housing system. In 1999 residential mortgages loans to individual households exceeded RMB 126 billion, doubling the previous year’s level. By August 2002, the total outstanding balance of residential mortgages reached RMB 763 billion, a 27% increase compared to the balance at the beginning of 2002, and some 34 times that at the end of 1997. More than half of the real estate loans newly issued in 2002 were residential mortgage loans. The residential mortgage market has fuelled China’s booming residential housing development market. Traditionally, China’s housing finance sector has been confined to the primary residential markets while the secondary residential market has been undeveloped. The residential mortgage market is dominated by China’s four state-owned commercial banks. The basic requirements imposed on borrowers are the following: the mortgage loan amount must not exceed 80% of the valuation or purchase price of the house; the payment-to-income ratio must not exceed 70%; the ratio of the total of the other assets associated with the loan amount must be greater than or equal to 25%; the mortgage term shall not exceed 30 years; and the borrower’s age plus the mortgage term must not exceed 65 years. US studies by Kau et al. (1994) deem residential mortgage debt to be providing the borrowers with prepayment (call) and default (put) options. Under prepayment, the borrower repurchases the market value of the mortgage, while under default the borrower sells the house to the mortgagee (lender) at a price equal to the value of the mortgage instead of the market value of the residential asset. Borrowers generally default when they cannot pay their monthly mortgage payments owing to death, disability, sudden illness or unemployment. Default of this type is characterized as involuntary because the borrower suddenly becomes financially constrained. The homeowner tends to avoid exercising the default option if residential prices have risen since the time of purchase. Other US studies by Green and Shoven, 1986 and Quigley, 1987 support the competing risks theory. They use the competing risks model to analyze mortgage prepayment and default risks. Their empirical studies show that many variables, including the characteristics of mortgage loans, the homeowner and macro economic environment, have significant influence on the prepayment and default of primary residential mortgages. The key variables include the loan-to-value ratio, loan size, loan age and mortgagors’ credit history. Quigley and Deng (2001) investigate the apparently irrational behavior of those borrowers who do not terminate their mortgages even when the option is deeply into the money. An option-based empirical model is estimated to investigate the behavior of irrational “wood heads”. They analyze the covariates of unobserved heterogeneity within a large sample of mortgage holders, and with the results of Stinebrickner (1999), develop a simulated maximum likelihood estimator (SMLE) of the proportional hazard model in order to estimate the competing risks of mortgage prepayment and default. The model estimation recognizes the unobserved heterogeneity owing in part to the behavior of “wood heads”. It should be highlighted that the borrower’s motivation for prepayment in China is different from that in the US or other developed countries. All residential mortgages are adjustable rate mortgages (ARMs), and whenever the People’s Bank of China announces a rate adjustment, the new mortgage rate applies to all existing mortgages as of the start of the following year. Owing to the relatively longer processing time and immaturity of China’s mortgage market, virtually all mortgage prepayments are early payoffs rather than being those of mortgage refinancing. The number of default cases in China is quite small, primarily because many of China’s mortgage borrowers use the mortgage to share the presale risk with their bank during the residential construction period. Furthermore, presales are very popular in China. To many of China’s households, their housing aspirations, financed by mortgages, are deemed to be their lifetime investments. In the developed housing finance markets of the US and Hong Kong, mortgage insurance has become an important investment instrument to cover some of the risks incurred by investors in residential mortgage-backed securities originated by the housing finance institutions. US residential mortgage insurance insures credit risk owing to the principal mortgagor’s, i.e. the insured’s loss of income, unemployment, permanent disability and catastrophes. In contrast, residential mortgage life insurance (RMLI) is emerging as a key investment instrument in China, although in its infancy stage. The RMLI offers the insured mortgagor a life-insurance death benefit, arising from only illness or accident, of settling the insured’s outstanding residential mortgage balance. Nevertheless, the potential for such a RMLI market can be immense as almost all Chinese and urban resident households use borrowed money to finance their houses for homeownership or investment purposes. Prepayments of some underlying mortgages of the RMLIs have occurred, leading to a premature termination of both the residential mortgage and the insurance commitment to settle the outstanding mortgage balance even though the insured has not yet passed away. Because such a prepayment significantly influences the pricing of the RMLI, it is imperative to know more about the prepayment rate of occurrence and the prepayment characteristics of the underlying residential mortgages. It is just as imperative to empirically test these characteristics that influence prepayment behavior. Hence, prepayment of RMLI mortgages is one of the most important risks to China’s RMLI insurers. A conjectural trend is that as residential mortgage lending quickly develops in China, both the primary and secondary financial markets as well as the insurance industry will recognize the importance of an in-depth understanding of the structural prepayment behavior among China’s residential mortgagors. This is very important in creating financially viable RMLIs in China and the appropriate underwriting criteria of the mortgagors. By insuring the underlying RMLI mortgage, the insurer bears the risk of terminating the mortgage owing to prepayment and default. Prepayment stops the future streams of insurance premiums while default stops certain future premiums but is recovered as part of good arrears management to avoid foreclosure proceedings. In addition, the insurer is assumed to incur a loss that is proportional to the unpaid mortgage balance. Therefore, probabilities of prepayment and default of mortgage loan enter into the insurance premium calculations of the RMLI insurer (Dennis et al., 1997 and Tiwari, 2001). The risks of the residential borrower’s mortality, prepayment and default are important factors to be considered in establishing the RMLI pricing model in terms of its single premium. In general, such a single premium of the RMLI can be built up from six elements in the following expression: The single premium of the RMLI product = (Death benefit or the expected accumulated loss due to death) + (Expected present value of prepayment factor) + (Expected present value of default factor) + (Fixed cost) + (Variable cost incurred by insurer) + (A gross profit margin for the insurer). Prepayment of underlying RMLI mortgages is the principal key risk element to RMLI insurers in China, and the financial markets as well as the insurance industry should recognize the adverse outcome of widespread, unforeseen and premature termination of the underlying RMLI mortgages. In contrast, mortgage defaults would not lead to premature terminations when the defaults are paid within a certain, short grace period of time in order to avoid foreclosures. Residential mortgage prepayment is popular in China. However, prepayment is used for early pay-offs rather than for mortgage refinancing. The insured (i.e. the mortgagor-holder of the RMLI) can freely prepay while the RMLI itself does not contain prepayment penalties. It is therefore appropriate to investigate the prepayment characteristics of the underlying RMLI mortgage. As a result, this study investigates the structural definition and behavior of the risk of prepayment pertaining to China’s developing RMLI market. It then models the prepayment rate analytically in terms of a hazard rate function, and conducts the associated structural model estimation that can rigorously account for the observed prepayments in terms of the observable macro economic, loan specific and borrower specific characteristics. Utilizing a limited pilot study of 1000 Shanghai residential mortgagors who took up RMLIs between January 1999 and December 2003, provided by the Shanghai branch of a large and reputable German insurance company, this study applies the Cox proportional hazard model to estimate the underlying RMLI mortgage prepayment structure. The model also helps to quantify the degree of prepayment variation on the basis of the observable and causal risk characteristics. The remainder of the study is presented accordingly. In the next section, the study outlines the emergence of the RMLI in China. Section 3 discusses the data source, the definition and construction of the variables concerned. Section 4 discusses the underlying RMLI mortgage prepayment risk model and the related literature. Section 5 discusses the corresponding empirical estimation while Section 6 presents the study’s concluding findings.

This study investigates the structural and behavioral experience of the risk of prepayment for the underlying mortgages of China’s rapidly developing residential mortgage life insurance (RMLI) market. A reliable private prepayment data set for China’s commercial center—the city of Shanghai—is employed. The study estimates the relationship between RMLI’s underlying mortgage prepayment risk and observable macroeconomic factors, loan specific factors and borrower specific characteristics. A Cox proportional hazard (CPH) model is applied for this purpose. In terms of the policy relevance for the RMLI market in Shanghai and for China broadly, the most important risk factors in affecting RMLI’s underlying mortgage prepayment behavior are found to be combined monthly income of the co-borrowers, growth in gross domestic product; number of co-borrowers, and initial loan-to-value ratio. These risk factors should be regularly and critically monitored in order to sustain the viability of China’s rapidly developing RMLI market.