The Impact of COVID-19 on MBS Prepayment Rates

This study empirically examines the impact of COVID-19 on the prepayment rates of mortgage-backed securities (MBS), using monthly data from the Korea Housing Finance Corporation (KHFC) spanning June 2004 to December 2022. The analysis reveals that prepayment rates declined during the pandemic, primarily because borrowers prioritized liquidity amid heightened employment insecurity, reduced income, and broader economic uncertainty. Notably, increased market volatility—reflected in indicators such as the VIX—and rising base interest rates further discouraged prepayment behavior. However, these behavioral shifts appear to be temporary, with prepayment patterns expected to gradually revert to their previous trajectories as economic conditions stabilize. This study sheds light on how exogenous shocks such as the COVID-19 pandemic influence financial consumer decision-making and offers meaningful policy implications for promoting financial market stability and enhancing MBS risk management strategies.