Mortgage Curtailment and Default
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Ting-Heng Chu, Larry J. Prather and Perry Wang
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International Real Estate Review
We explore the effect of mortgage curtailment payments on subsequent default probabilities. Although curtailment is not popular in western countries, it is the dominant form of prepayment in Asia. Using more than 6 years of mortgage performance records from an Asian bank, we investigate the impact of curtailment payments on mortgage default risk. The results of logistic regressions reveal that the cumulative curtailment is the most significant factor in predicting the future default probabilities of a seasoned mortgage pool. Thus, mortgage modeling for Asian countries should be different from mortgage modeling for western countries.