The Impact of Borrower and Loan
Date
2011-05-05
Authors
Khan, Mohamed Hoosain
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Abstract
In South Africa, there is currently little research available on mortgage default
and the determinants of default. The purpose of this research was to evaluate
and distinguish between mortgage specific factors (including borrower and loan
characteristics), driving mortgage default patterns in South Africa.
This study intended to provide guidance to the South African banking industry
(i.e. banking institutions), the South African Reserve Bank (policy maker and
regulator), and the broader South African population in general. In addition, the
results of the study can be utilised by banking institutions as inputs into their
origination scorecard, policy rules and risk-based pricing models.
Due to the sensitivities around financial institution’s data in South Africa, the
sample used for this study was all current (on book) mortgage loans from an
anonymous (single) financial institution in South Africa. Also, due to the
practical availability of data, the sample period covered all current loans from
said financial institution from August 2006 to December 2008, with information
covering each loans default or non-default status during that time period.
Based on the review of the literature surrounding mortgage defaults, five
hypotheses were formulated. Only 1 of the 5 variables was found to be a good
differentiator of mortgage default in South Africa. Current Loan-To-Value (LTV)
was found to be the most critical and by far the largest contributor to the
model’s ability to differentiate defaults. It was found that the higher the Current
LTV, the more likely those borrowers would default. This finding is in line with
conventional wisdom in the mortgage industry, in that loan-to-value ratios are
positively correlated with mortgage default.
The Age of the mortgage (i.e. account age in months since loan origination),
Instalment to Income (ITI), Borrower age (years), Borrower Income and Balance
Outstanding were found to be irrelevant in contributing to the model’s ability to
differentiate mortgage defaults. Also, Balance (Loan) Outstanding was found to
be the variable having the least impact on the model’s ability to differentiate
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mortgage defaults.
In summary, given that Current LTV (loan characteristic), was found to be the
only suitable variable in differentiating mortgage defaults, the conclusion is that
only “Loan” characteristics (i.e. Loan to value) impact on mortgage defaults in
South Africa. Furthermore, it is the “equity” theory that describes mortgage
defaults, and not the “ability to pay” theory of default
Description
MBA - WBS
Keywords
Mortgages, South Africa, Mortgage defaults, South Africa