China Housing Mortgage Credit Risk

In the economic transition context of in-depth residential constitution reform and the accelerated urbanization process, Chinese residential mortgage market has experienced a leaped development. However, the residential mortgage default rate increased gradually after the rapid prosperity of this market. The default rate of residential mortgage not only affects the bank's expected revenue, but also brings the dynamic impacts to the whole macroeconomics through the financial accelerator. The residential mortgage default risk becomes the focus of banking industry and the academia in China. By using the theoretic analysis, this paper compares the residential mortgage market in Chinese transitional economy with the one in western countries, and summarizes the characters of residential mortgage market in China. Meanwhile, I examine the adaptability of classic theories in China on the basis of features, and then point out the theory that is compatible with the transitional economy through analyzing the hypothesis and adapted environment of western mature theories. On the basis of sample data from the city of DaLian, I adopt the Logistic model to test the hypotheses, and identify the major determinants of residential mortgage default risk in China. At the end of this paper, I put forward some proposals on how to strengthen and improve the risk management in domestic residential mortgage market. The major conclusions of this paper are as follows.1. Unlike the foreign mature market, Chinese residential mortgage market has the features of its own. Namely, the housing price and interest rate experienced continuous rise as the results of residential constitution reform and accelerated urbanizing; all mortgages prior to 2006 in China were pure Adjustable rate mortgage; Financial institutions cannot establish discriminate interest rate for individuals; the lack of secondary market implies lenders will assume a large portion, if not all, of borrowers' risk; the Chinese borrowers will face a great deal of transaction cost for default behavior; because of lack of perfect residential security system, the promises to get the mortgage back is unconvincing when borrower default. All of the above will affect borrower's behavior.2. Ability to pay theory is more applicative in Chinese residential mortgage market in contrast with equity theory. The sustaining rise of housing price from 1998 made the "put option" is "out of money", the adjustable mortgage rate and the rising interest rate made "call option" out of money too; Chinese borrowers' intended default behavior is not rational for the great deal of transaction cost in the Chinese market. So we can conclude that equity theory has not the adapted environment in China, and our empirical results indicate that ability to pay theory is more applicative to Chinese residential mortgage market in contrast with equity theory.3. Interest rate, loan-to-value, debt servicing ratio, household registration, educational level, and new or existing house are major determinate factors of default behavior. On the basis of ability to pay theory and the data from Dalian city. I adopt the Logistic method to estimate the binary choice model and to test the determinate factors of default behavior. The empirical results indicate that interest rate. loan-to-value, debt servicing ratio, household registration, educational level, and new or existing house are major determinates of default behavior, and age of borrower, family income, term of loan, appraisal price, age of loan, trigger events will affect the default probability. The higher interest rate. LTV. debt servicing ratio are always related to incidence of higher default, on the contrary, higher education degree and longer term are always related to small default probability, the foreigner's residential investment behavior and trigger events will also increase the default probability. Meanwhile, we also get some results different from above hypothesis, namely, the family income has less effect on default probability; age of borrower has the negative effect on default probability, and the borrower who have bought the existing housing has more default probability.4. Based on the above analysis, I put forward some proposals. Although the default rate is still at lower level, it had raised a lot from the history point of view. Financial institutions have not paid enough attention to the default risk, and the government's indirect guarantee deteriorated the situation, so we should pay more attention and take more actions to alleviate the risk. Because of lack of risk management and prevention consciousness, banks have not collected the correct and enough fundamental information from borrowers, this kind of information is foundational for risk management. So we should use more useful skills and methods to get the correct information. On the basis of individual feature, we can adopt categorize method to classify borrowers, and then banks can create more financial instruments for different borrowers. Finally, in order to diversity the risk of residential mortgage default, China should develop the secondary market up the storm.