A Study on the Changes in MBS Prepayment Rates During the COVID-19 Pandemic

Purpose: This study aims to examine how the COVID-19 pandemic, as an exogenous shock, affected prepayment behavior in the Korean mortgage-backed securities(MBS) market and to empirically identify how financial-market uncertainty influences borrower repayment decisions. Research design, data and methodology: This analysis utilizes monthly pool-level data (2004.06~2024.12) on MBS issued by the Korea Housing Finance Corporation, with the constant prepayment rate(CPR) as the dependent variable. A 2-step System GMM model is employed, incorporating COVID-19 period dummy variables, interest-rate spread, housing-price index, consumer prices, stock index, seasoning period, and seasonal moving dummies as control variables. Results: The empirical findings reveal that prepayment levels declined overall during the COVID-19 period, associated with heightened liquidity-holding strategies among households due to income and employment instability. In addition, the market-volatility indicator(VIX) shows a statistically significant negative relationship with prepayment, indicating a pronounced suppressing effect during the early and middle stages of the pandemic, which later weakened. Conclusions: The influence of COVID-19 is assessed as a short-term shock, suggesting that future crisis responses require more sophisticated policy frameworks that consider financial psychology and market uncertainty.