Real Estate Development Loan Default Risk Model

This article investigates the default risk of real estate development loan, which is crazy necessary for banks in China. The model takes into account the stochastic properties of both collateral value and repayment resources, which may be the borrowing firm's total asset value or the real estate's sales. We use the structural approach to model default risk, assuming that the first repayment resources will determine the event of default but the collateral value is the only stochastic element determining recovery. Through the martingale pricing method, we can get the risky loan's default probability, expected loss, credit spread and other indexes. Numerical examples are provided to demonstrate the character of the default probability and credit spread for various parameter values. Moreover, we provide an intuitive explanation to this result. Besides that, we propose a practical method to estimate parameters for our model, which depends on the Hedonic price model and the market adjusted method. At last, the empirical application is discussed.