Ebook Tell the True Value of Mortgage Loans Dynamically with Survival Analysis
In recent years, consumer credit loans have increased rapidly. Accompanied with this growth, the profits and losses of consumer credit loans have great effects on the revenue of a financial institution. In 2004, one of the biggest enterprises in South Korea, LG group, verged on bankruptcy in the credit card debt crisis because of the huge loss of LG bank on consumer credit loans. Similar credit card debt crises also occurred in Hong Kong and Taiwan which cause dramatic loss and lead to the deflation of consumer loan markets. Recently, US sub-prime mortgage debacle is getting more and more sever.
The announcement of US Department of Treasury that Federal Housing Finance Agency (FHFA) takes over Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) shows the economic impacts caused by the turmoil of consumer financial market are so critical that governments are now urged to take measures to combat the spread of financial collapse. As for financial institutions, although credit risk is risen by the violent turbulence of consumer financial market, it is impossible to terminate all risky consumer credit loans instantly because of the global economic recession has already reduced their profits substantially.
Facing the dilemma of keeping loans to increase the profit or terminating loans to reduce the risk, monitoring existing consumer credit loans dynamically becomes the only measure for financial institutions. In addition to the credit analysis for loan-granting decision, the dynamic analysis about when will an existing loan default during the loan term based on its payment behavior also becomes a new issue for financial institutions. There are two benefits dynamic monitoring has.
First, the change of a customer’s payment ability will be caught by dynamic monitoring which helps the financial institution to modify the expected profit gained from the loan which affects the expected cash-in-flow of the financial institutions.
Second, dynamic monitoring also helps financial institutions to catch the risky loans which have high probability of defaulting in near future and then they can adopt appropriate measures, such as advancing the call loan procedure or increasing collaterals, to reduce the loss. That is why internal rating based (IRS) approach of New Basel suggests that every financial institution reviews all its consumer credit loan customers more than twice a year to estimate the default probability and loss given default of its loan portfolio.
Among all consumer credit loans, mortgage loans have the highest profits and also the highest risk because a default mortgage loan may bring a huge loss based on the high value of loan principal. However, the high profit caused by the high risk makes abandoning all of mortgage loans regretted. Therefore, improving the efficiency of mortgage loan failure prediction is in haste for financial institutions to diminish the credit risk and enlarge the profit of their consumer credit loan portfolio.
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