The use of credit scoring in the mortgage industry
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Hendrik Wagner is Product Manager — Data Mining Solutions at the SAS EMEA head office in Heidelberg, Germany. He observes market trends and innovative applications of SAS analytical software. Based on the knowledge gathered from working with customers and local offices, he helps define, develop, strategise, market and sell industry-specific solutions. Since 2000, he has been deeply involved in the creation of the SAS Credit Scoring solution that enables banks to bring their credit scoring process inhouse. Since 2002, Dr Wagner’s work has centered on the larger SAS Credit Risk solution which responds to the challenges brought upon banks by the new Basel capital accord. Dr Wagner has worked at SAS EMEA since April 1998. His first project included the development of analytical approaches to cross-selling in the financial industry.
Abstract In times of increased focus on risk management, acquiring or growing comparaatively low risk mortgage portfolios has become an attractive value proposition. Banks that pursue an aggressive growth strategy in this sector, do, however, require risk control mechanisms that enable them to make a clear judgment on how great a growth appetite they can afford to have in order to still grow profitably. Moreover, under Basel II, the proper quantification of mortgage portfolio risk tends to help the release of own capital, because the mortgage portfolio is one of those portfolios where the relative benefits of internal ratings-based approaches compared with the standardised approach are greatest. Credit scoring models in general, and credit scorecards in particular, are suitable methods for quantifying the risk of an individual mortgage applicant or mortgage customer. In addition to score card development, this paper reviews alternative scoring model types that could be used for mortgage scoring. It presents reasons why it is beneficial to build such models in-house, before focusing on the steps necessary for building a mortgage scorecard. Finally, it discusses the important topics of creating segments, deploying models and eventually monitoring models. Keywords
Mortgage scoring, credit risk, BASEL II, credit scoring, scorecard
INTRODUCTION
Hendrik Wagner Data Mining, SAS EMEA, Neuenheimer Landstrasse 28–30, D-69043 Heidelberg, Germany Tel: +49 6221 416 336; e-mail: [email protected]
In times of increased focus on risk management, acquiring or growing comparatively low-risk mortgage portfolios has become an attractive value proposition. Banks that pursue an aggressive growth strategy in this sector (for example by increasing Loan to Value ratios or lowering the quality of distribution channels) do, however, require risk control mechanisms that enable them to make a clear judgment on how great a growth appetite they can afford to have in order still to grow profitably.
# Henry Stewart Publications 1479–1846 (2004)
Vol. 9, 2 179–183
Moreover, under Basel II, the proper quantification of mortgage portfolio risk tends to help the release of own capital, because the mortgage portfolio is one of t
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