An Empirical Study On Mortgage Loan Default

The size of mortgage has been increased since1998, and has taken large proportion in bank lending, then increased mortgage default potentially, the finance crise at the end of2007has resulted from mortgage default. Recently, Chinese commercial banks have launched new types of mortgage, such as Fixed Rate Mortgage (FRM) and Balloon Mortgage (BM), which takes challenges of mortgage risk management. What’s more, the collection of property taxes may has influence on mortgage markt, then the risk management of commercial banks ultimately. Taking some studies of mortgage default may has important significance to the risk management and profits of commercial banks in the post-crisis era. As for Whenzhou, which the price of property has been falling, this research may find efficient mothod of keeping from mortgage default, so it has practical significance.This paper solves a dynamic model of mortgage default based on China’s reality, taking into account labor income, house price, interest rate and inflation. Then calculate default probability and profitability by the theory of utility maximization, taking simulation of these numerical models and using MATLAB, this paper gets some usefull results.Household chooses default, when negative home equity reaches a certain level. Default probability decreases with age. High Loan-to-Value (LTV) at the origination of mortgage increase probability of negative home equity, it affects default probability by tightening borrowing constraints. Comparing different mortgage types, we find that Adjustable Rate Mortgage (ARM) defaults when interest rate is high and are affected by idiosyncratic shocks to income, the reverse is suitable for FRM. ARM is more sensitive to Loan-to-Income (LTI) and easily defaults by cash-flow reasons, whereas, FRM is more sensitive to LTV and defaults by wealth reasons. Profitability of banks and default probability have a negative relationship.