Citibank models credit risk on hybrid mortgage loans in Taiwan

Citibank models credit risk on hybrid mortgage loans in Taiwan

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Article ID: iaor2006874
Country: United States
Volume: 35
Issue: 3
Start Page Number: 215
End Page Number: 229
Publication Date: May 2005
Journal: Interfaces
Authors: , , , ,
Keywords: computers, forecasting: applications
Abstract:

A new type of hybrid loan in Taiwan consists of a traditional residential mortgage with an attached line of credit. Motivated by declines in Taiwanese property values and unexpected credit losses on all types of loans secured by residential real estate, we developed new statistical models for analyzing the credit risk on traditional mortgages, the hybrid loans, and pure equity lines of credit. Nonstationary Markovian models represent probabilities of transition among different financial states for the three credit instruments. We used logistic and regression models to estimate the losses on defaulted loans and the utilization of credit lines. We calibrated the models with account-level data and integrated them into comprehensive forecasting models that revealed differences in risk profiles among the three types of credit and among different segments of each portfolio.

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