Structural Prepayment Risk Analysis of Residential Mortgage Life Insurance in a Developing Market

As with pools of residential mortgages, the survival analysis for the prepayment of Chinese residential mortgage life insurances (RMLIs) in Shanghai is influenced by a combination of risk factors such as macroeconomic factors, loan specific factors and borrower specific factors. Survival analysis estimates the structural impact analysis of these risk factors on prepayment risk. This paper investigates the prepayment behavior of insured residential mortgagors (borrowers) in Shanghai through an analysis of the maximum likelihood estimates and the Cox proportional hazard model, which in turn is concerned with measures of prepayment variations by selected key risk factors. The investigation is based on the prepayment experience of the underlying mortgagors. The findings highlight that the hazard rate for prepayment is largely dependent on the combined income of co-borrowers, the geographical region where the borrower lives, growth in gross domestic product, number of co-borrowers and the initial loan-to-value (ILTV) ratio. Other less important risk factors include the age, gender, marital status, employment status of the borrower, house price inflation and the length of the mortgage term. The relationship between age of the loan and other risk factors, on the basis of the cumulative hazard graphs, indicate a higher hazard of prepayment for the insured mortgage life borrowers with ëless than 3%' and ëabove 6%' of house price inflation; with ëless than 30% of growth in GDP; with ë6 to 15 years' of length of loan (mortgage) term; with ëless than 40%' of ILTV ratio; with ëabove 40 years old' and '30 to 40 years old' for the age of borrower; with the ëmale' borrower; the ëmarried' borrower; the ëself-employed' borrower; with ëabove RMB8,000' and ëRMB5,000 to RMB7,999' for combined income; with the borrowers who live ënot in Shanghai but within China'; and finally with ëabove three co-borrowers'.