Originating long-term fixed-rate Mortgages in developing economies: New evidence from Turkey

Download

15.pdf

Date

2009-12-1

Author

Erol, Işıl
Çetinkaya, Özgenay

Metadata

Show full item record

This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

Item Usage Stats

225
views

78
downloads

This paper intends to analyze the recent developments to introduce and integrate mortgage markets into capital markets of Turkey. The Capital Market Board has recently prepared a legal framework not only for a proper mortgage system, but also for the eventual securitization of these mortgages. Turkish banks started to contract, for the first time ever, long-term fixed rate mortgages. The paper uses traditional option-pricing model to evaluate the current 10-year fixed rate mortgage (FRM) contracts with embedded default and prepayment options in Turkey. Our study is the very first attempt to use an option pricing model to price the FRM contracts in an emerging economy with its different and unique dynamics. Our findings show that, in 2007 almost every bank, except for Is Bank, offered mortgage interest rates that were significantly below the equilibrium coupon rates, involving arbitrage profit for the borrowers. We also conclude that even if the prevailing mortgage interest rates are below the equilibrium rates, these rates are extremely high for establishing a well-functioning primary mortgage market in any economy. Finally, the effects of the global financial crisis are started to be felt in Turkish mortgage market as the banks have increased their mortgage coupon rates and shortened the contract maturities drastically over a very short time period, from September 2007 to November 2008.

Subject Keywords

FRMs, Option pricing model, Turkish mortgage market, Explicit finite difference method, Default, Prepayment

URI

http://www2.feas.metu.edu.tr/metusd/ojs/index.php/metusd/article/view/242
https://hdl.handle.net/11511/58377

Journal

ODTÜ Gelişme Dergisi

Collections

Department of Economics, Article

Suggestions

OpenMETU
Core

Computation of Hedging Coefficients for Mortgage Default and Prepayment Options: Malliavin Calculus Approach YILMAZ, BİLGİ; Kestel, Sevtap Ayşe (2019-11-01) This study explores the hedging coefficients of the financial options to default and to prepay embedded into mortgage contracts based on the change in spot rate, underlying house price and its volatility. In the computations, the finite-dimensional Malliavin calculus is applied since the distribution of both options is unknown and their payoffs are non-differentiable. Naturally, the hedging coefficients are obtained as a product of option's payoff and an independent weight, which permits the user to derive ...
Default risk of wage-indexed payment mortgage in Turkey Erol, Işıl; Patel, K (2005-09-01) This paper analyses default risk of wage-indexed payment mortgage (WIPM) in Turkey in comparison with other standard mortgage contracts originated in high inflationary economies. Emlak Bank launched WIPM linked to Civil Service employees' wage (CSW) index during high inflationary period of late 1990s. Concurrently, the government introduced a policy linking CSW index to semi-annual expected rate of inflation in an attempt to facilitate housing finance for the fastest growing sector of the population. We fin...
REITS in Turkey: the impact of the deviations from the global systems Yönder, Erkan; Erdil, Erkan; Department of Economics (2015) This dissertation aims to evaluate the impacts of divergence of Turkish Real Estate Investment Trust (REIT) sector/industry from the global REIT markets. Turkish REITs do not have to pay out any certain level of income to shareholders and have a sponsored ownership structure, governed by regulations different from the global REITs, while they are still tax-exempted. The dissertation investigates the tax arbitrage, impacts of corporate governance issues such as board composition and sponsor ownership on the ...
Analyzing Housing Market Dynamics using Linear and non-Parametric Models Yılmaz, Bilgi; Yerlikaya Özkurt, Fatma; Kestel, Sevtap Ayşe (2018-10-07) This paper analyzes the dynamic effect of macroeconomic indicators, such as financial and commodity market indicators on national housing markets. Furthermore, it does not only focus on the impact of the variables but also introduces a variety of models that based on the generalized linear models and multivariate adaptive regression splines. The models help us to identify the macroeconomic drivers of housing markets. Since the US has an adequate housing market data, the empirical analysis within the paper f...
Understanding real estate bubbles: an analysis of the recent trends in the Turkish housing market Karasu, Mustafa Nusret; Cömert, Hasan; Department of Economics (2015) The main aim of this thesis is to determine whether there is a real estate bubble in Turkey recently, where the house prices are increasing rapidly. In order to do this, the thesis tries to define the bubble concept, by reviewing literature. The common view among economists is that bubbles are deviation of prices from their fundamentals which is associated with sudden increases in prices. We usually witness harsh economic crises after the bursts of bubbles in economies and this constitutes the source of the...

Citation Formats

I. Erol and Ö. Çetinkaya, “Originating long-term fixed-rate Mortgages in developing economies: New evidence from Turkey,” ODTÜ Gelişme Dergisi, vol. 36, no. 2, pp. 325–362, 2009, Accessed: 00, 2020. [Online]. Available: http://www2.feas.metu.edu.tr/metusd/ojs/index.php/metusd/article/view/242.