An Analysis and Risk Modeling on Mortgage Payment Defaults in an Emerging Market

Abstract

This paper presents an analysis and default risk modeling on the non-performing loans of an emerging mortgage market. The analysis and the model, unprecedented for the market under study, utilize a large data set over several years with twenty-six variables that are contained in almost a hundred thousand records about the mortgage loan borrowers. The descriptive part of the analyses shows a statistical summary of all the available information on loans, defaults and loss exposures. The structure of the relation between the loan defaults and the borrower features is analyzed in detail with regression and logistic regression models. The exact and explicit probability distributions are derived for the default counts. Then, a compound Binomial distribution model is presented for the loss amounts arising from default events. Upon the obtained probability distributions, policy implications are discussed for the default risk management purposes.