DELINQUENCY RISK IN RESIDENTIAL ARMS

Abstract

Delinquency risk is a major area of concern to real estate mortgage lenders. With financial liberalization progressing at an amazing pace in Singapore, it will only be a matter of time before the first Mortgage-backed Securities (MBS) are issued hfere. Potential issuers of such securities will also be interested in the way delinquency risk affect the packaging of the securities. This paper provides the first rigorous analysis of residential adjustable mortgage delinquency in Singapore. This study is significant as delinquency risk is as crucial as default/ foreclosure risk but is often overlooked. The inter-relationship between delinquency and default/ foreclosure risk makes the understanding of all three forms of risks critical. By studying 633 individual mortgages from 1980 to 1999, it is firstly found that delinquency risk is dominated by marcoeconomic factors and several mortgage loan specific factors. Generally, property specific and borrower specific characteristics do not have a statistical significant impact on delinquency risks. Secondly, it is found that the risk of delinquency is highest when the mortgage is between 3400 and 3900 days' old from the mortgage origination date and again at around 4800 days. Thirdly, results show that the greatest likelihood of a loan coming out of delinquency is between 60 - 90 days and between 150-210 days. Lastly, evidence suggests that the rate of delinquency is closely correlated with the performance of the economy. Consistent with the finding that macroeconomic factors exert the greatest impact on delinquency risk, lenders' abilities to reduce the overall risks of delinquency in their mortgage portfolio are limited. Potential issuers of MBS will also likely to find it difficult to package the securities to reduce such risks.