By

Douglas Waldo, University of Sarasota

Robert Wharton, Palm Beach Atlantic College

Abstract

Confronted by an increasingly competitive environment, combined with the need for expanded portfolios, lenders are faced with the need to accept greater risk. In doing so, competitive pressures have called for more accurate risk assessment of mortgage portfolios. This study analyzed the predictive ability of variables commonly used in credit-scoring. Accurate prediction of defaulted mortgages was significantly increased through an analysis of loan-to-value ratios, interest rates, and years at current address.

Introduction

Melchiorre (1995) associated the growth in mortgage default rates with the increasing popularity of Adjustable Rate Mortgages (ARMs). While this type of mortgage agreement contributes to the feasibility of many loan applications, the experience of what Shelton (1995) referred to as payment shock, has contributed to the prevalence of delinquency and default over the past several decades. While many borrowers enjoy the benefit of lower payout in the initial years of the agreement, subsequent rate adjustments in excess of increases to borrower income or appraised home value, often place borrowers in seemingly unrecoverable circumstances. Regardless of whether default can be avoided, adjustments to mortgage interest rates clearly influence borrowers

Articles, Marketing
DISCRIMINANT ANALYSIS, loan-to-value ratio, mortgage agreement