COMPARING TRADE-OFF ADJUSTMENTS IN CREDIT RISK ANALYSIS OF MORTGAGE LOANS USING AHP, DELPHI AND MACBETH

Fernando A F Ferreira,Sérgio P Santos

doi:10.3846/1648715x.2015.1105321

Abstract

Due to the severe restrictions on access to credit resulting from the current economic climate, credit risk analysis of mortgage loans has been considered paramount for banking institutions and is currently accompanied by higher credit underwriting standards. In this paper, we present an empirical comparison of three decision support tools (i.e. Analytic Hierarchy Process (AHP), Delphi, and Measuring Attractiveness by a Categorical Based Evaluation Technique (MACBETH)) in the specific context of trade-off readjustments in credit risk analysis of mortgage loans. We conducted a panel study with credit analysts and focused on five lines of comparison: ease of use; time-consumption; ease of applicability; accuracy; and overall evaluation. Results indicate that Delphi surpasses AHP and MACBETH in terms of ease of use, time-consumption and ease of applicability. As for accuracy, the differences obtained between AHP and MACBETH are not significant, and both methods perform better than Delphi. Most of the decision makers considered AHP the “overall best” approach.

Highlights

The relationship between financial and real estate markets and mortgage lending has been highlighted after the most recent United States’ subprime
In line with Ferreira et al (2011a), there is a lack of transparency in the way trade-offs among evaluation criteria are defined
By comparing three decision support methods to define the relative importance of a pre-established set of mortgage loan risk evaluation criteria in use by one of the largest banks operating in Portugal, this study aims to contribute to this under-researched area

Summary

Introduction

The relationship between financial and real estate markets and mortgage lending has been highlighted after the most recent United States’ subprime (cf. Kowalski, Shachmurove 2011; Puri et al 2011; Yeager 2011; Beltratti, Stulz 2012). Researchers have emphasized how important mortgage lending decisions are to revert the dramatic changes and declining values of real assets in many markets. Comparing trade-off adjustments in credit risk analysis of mortgage loans using ahp, Delphi and macbeth. The use of these approaches in the evaluation of credit risk has been very scarce and, as far as we are aware, no study compares their effectiveness in determining the relative importance of the different criteria used in risk analysis of mortgage loans. By comparing three decision support methods to define the relative importance of a pre-established set of mortgage loan risk evaluation criteria in use by one of the largest banks operating in Portugal, this study aims to contribute to this under-researched area. A panel study with credit analysts was conducted and the performance of each method assessed against five major lines of comparison: ease of use; time-consumption; ease of applicability; accuracy; and overall evaluation

Objectives

Results

Conclusion