Abstract
In Asian Countries or some countries with high saving rates, partial prepayment, curtailment, is a common payment behavior. When borrowers have extra money more than the basic living needs, they usually use that additional amount to repay the principle early in order to curtail the loan balance and also reduce the interest payment. Based on mortgage loan-level data obtained from a commercial bank in Taiwan, we find the curtailment effect is material. Therefore, we incorporate the curtailment factor into the explanatory variables in analysis. More specifically, the aging patterns of prepayment rate and default rate are different. The prepayment rate exhibits a “S” shape; whereas the default rates initially increase progressively and then decrease thereafter similar to a Gamma distribution. By using the separate logit model with age functions accordingly, we can capture the borrowers’ payment behavior, and accurately estimate the prepayment and default rates.