Abstract
Mortgage loans for home purchase require careful analysis by all parties involved in the transaction, and credit-scoring is usually adopted to assist the decision process. From a credit institution standpoint, credit-scoring for mortgage loan risk evaluation becomes even more important in scenarios of economic turbulence and recession, primarily because of the severe restrictions imposed on credit availability that result from reduced access to both money and debt markets and subsequent decreasing liquidity. Employing an AHP – Analytic Hierarchy Process – based approach in the creditscoring system used by one of the major banks in Portugal, this study proposes a methodological framework conceived to adjust trade-offs among evaluation criteria and provide decision makers with a more transparent mortgage risk evaluation system. Practical implications of our framework are also discussed.
Highlights
Different interlinked factors have been responsible for dramatically changing the current economic conjuncture worldwide
As shown in the literature (e.g. Altman, Saunders 1997; Lopez, Saidenberg 2000; Doumpos, Zopounidis 2001; Doumpos et al 2002; Thomas 2009; Twala 2010), the progress achieved over the years does not mean that the current methodologies are without limitations and the need to develop more accurate credit-scoring systems has been put to rest
We describe in this subsection the process followed in terms of trade-offs readjustment in a mortgage loan credit-scoring system
Summary
Different interlinked factors have been responsible for dramatically changing the current economic conjuncture worldwide. The recent United States’ subprime has been identified as the major cause for the declining values of real assets in many markets (cf Yeager 2011; Kowalski, Shchmurove 2011; Puri et al 2011; Wu 2012; Xiao-yan et al 2011; Beltratti, Stulz 2012). For this particular reason, the relationship among financial and real estate markets, respective evolutionary trends and mortgage lending have been accompanied and/or studied with particular interest. Each mortgage loan requires careful analysis by all parties involved in the decision process (e.g. individuals, families, credit institutions) and, under this scenario, “credit scoring benefits both lenders and borrowers” (Avery et al 2004: 854)
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