Delinquency Risk in Residential Arms

Abstract

Delinquency risk is a major area of concern to real estate mortgage lenders and potential issuers of Mortgage-backed Securities (MBS). This paper provides the first rigorous analysis of residential adjustable mortgage delinquency in Singapore. By studying 633 individual mortgages from 1980 to 1999, it is found that delinquency risk is dominated by macroeconomic factors and several mortgage loan specific factors. In particular, market sentiment, change in mortgage rate and the premium of mortgage over investment rates have a positive influence on delinquency, while change in unemployment rate, capital appreciation of residential properties and housing rentals exerts a negative impact. However, the direction of influence of the change in economic growth is unclear. Generally, property-specific and borrower-specific characteristics do not have a statistical significant impact on delinquency risks. It is also discovered that rate of delinquency and the performance of the economy have a consistently negative relationship. 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 find it difficult to package the securities to reduce such risks.