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Citibank Models Credit Risk on Hybrid Mortgage Loans in Taiwan

Author

Listed:
  • L. Douglas Smith

    (Center for Business and Industrial Studies, College of Business Administration, University of Missouri–St. Louis, St. Louis, Missouri 63121)

  • Canser Bilir

    (Center for Business and Industrial Studies, College of Business Administration, University of Missouri–St. Louis, St. Louis, Missouri 63121)

  • Vega W. Huang

    (Citibank NA, Consumer Bank, 3F, Exchange Square, No. 89 Sung-Jen Road, Taipei 110, Taiwan)

  • Kuo-yao Hung

    (Citibank NA, Consumer Bank, 3F, Exchange Square, No. 89 Sung-Jen Road, Taipei 110, Taiwan)

  • Mark Kaplan

    (Citibank NA, Consumer Bank, 3F, Exchange Square, No. 89 Sung-Jen Road, Taipei 110, Taiwan)

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.

Suggested Citation

  • L. Douglas Smith & Canser Bilir & Vega W. Huang & Kuo-yao Hung & Mark Kaplan, 2005. "Citibank Models Credit Risk on Hybrid Mortgage Loans in Taiwan," Interfaces, INFORMS, vol. 35(3), pages 215-229, June.
    • Handle: RePEc:inm:orinte:v:35:y:2005:i:3:p:215-229
    DOI: 10.1287/inte.1050.0142
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    References listed on IDEAS

    as
    1. Paul Zipkin, 1993. "Mortgages and Markov Chains: A Simplified Evaluation Model," Management Science, INFORMS, vol. 39(6), pages 683-691, June.
    2. Lawrence, Edward C. & Smith, L. Douglas & Rhoades, Malcolm, 1992. "An analysis of default risk in mobile home credit," Journal of Banking & Finance, Elsevier, vol. 16(2), pages 299-312, April.
    3. Smith, L. Douglas & Lawrence, Edward C., 1995. "Forecasting losses on a liquidating long-term loan portfolio," Journal of Banking & Finance, Elsevier, vol. 19(6), pages 959-985, September.
    4. Cunningham, Donald F & Capone, Charles A, Jr, 1990. "The Relative Termination Experience of Adjustable to Fixed-Rate Mortgages," Journal of Finance, American Finance Association, vol. 45(5), pages 1687-1703, December.
    5. Eric Rosenberg & Alan Gleit, 1994. "Quantitative Methods in Credit Management: A Survey," Operations Research, INFORMS, vol. 42(4), pages 589-613, August.
    6. R. M. Cyert & H. J. Davidson & G. L. Thompson, 1962. "Estimation of the Allowance for Doubtful Accounts by Markov Chains," Management Science, INFORMS, vol. 8(3), pages 287-303, April.
    7. repec:bla:jfinan:v:44:y:1989:i:4:p:923-52 is not listed on IDEAS
    8. repec:bla:jfinan:v:44:y:1989:i:4:p:909-22 is not listed on IDEAS
    9. Pan Kang & Stavros A. Zenios, 1992. "Complete Prepayment Models for Mortgage-Backed Securities," Management Science, INFORMS, vol. 38(11), pages 1665-1685, November.
    10. Campbell, Tim S & Dietrich, J Kimball, 1983. "The Determinants of Default on Insured Conventional Residential Mortgage Loans," Journal of Finance, American Finance Association, vol. 38(5), pages 1569-1581, December.
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    Cited by:

    1. Zhixin Liu & Ping He & Bo Chen, 2019. "A Markov decision model for consumer term-loan collections," Review of Quantitative Finance and Accounting, Springer, vol. 52(4), pages 1043-1064, May.
    2. He, Ping & Hua, Zhongsheng & Liu, Zhixin, 2015. "A quantification method for the collection effect on consumer term loans," Journal of Banking & Finance, Elsevier, vol. 57(C), pages 17-26.

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