Examining Expected Yield and Risk in the Shared Mortgage Program

The paper analyzes the expected yield of mortgage loan provider and the money’s worth of borrower so as to evaluate the pricing adequacy of the shared mortgage loan program which was newly introduced by the Korean government in 2013. For the research purpose, we first develop a spreadsheet model to identify cash flows of the mortgage loan program for 20 years up to the maturity. In addition, we conduct Monte Carlo simulation analyses using stochastic process of home price and interest rate in order to examine if the program is fairly priced for low income households who borrow money to purchase their own houses.
From the analyses, we found that the shared mortgage products such as shared appreciation mortgage(SAM) and shared equity mortgage(SEM) were priced in favor of loan provider rather than borrower who wants to purchase his (or her) own house with mortgage loan under a normal scenario on the future house value based on the past experience of the Korean housing market. Another finding of the research is that lender’s yield of SEM will have a much higher risk as compared to the gain of SAM.
Nevertheless, such advantage of lender in the normal scenario can also be easily reversed to the favor of borrower under an adverse scenario where average increase in house value is assumed to be zero. This implies that the pricing adequacy of the shared mortgage products depends greatly on the future movement of house value mortgaged for the loan. Therefore, the government should keep its eyes on the movement of house value in the real estate market so as to avoid the collapse of the shared mortgage program.