This thesis is devoted to UK Mortgage Performance Modelling. The research conducted uses an option pricing methodology to model theoretically the value of Mortgages, the Option to default and the probability to default and to compare the predictive accuracy of the latter with the predictive accuracy of data driven credit-scoring techniques. Theoretical models are constructed to represent the life cycles of loans collateralised by real property operating within a stochastic economic environment of house-price and interest rate. These realistic mortgage models provide a confirmation of recent research based upon a relaxation of the assumption of financially rational, 'ruthless' prepayment, bridge a potential oversight in existing research by an extension of existing modelling in the stochastic behaviour of the house price process and present a proposal for a straightforward approach utilising characteristic measures of borrower delinquency and insolvency that enables estimation of the default probabilities implicit in residential mortgages using a simple but enhanced optimising structural model. This model straightforwardly demonstrates that one can predict the probability of eventual default, beginning at the origination of the loan, the time when a lender would be most interested in making such a determination. Secondly the problem of mortgage loan default risk is empirically assessed in a number of different ways focusing upon analysis of the competing risks of early termination, the inclusion of macro-economic variables - time varying covariates and unobserved borrower heterogeneity. Key insight is provided by means of a multi-period model exploiting the potential of the survival analysis approach when both loan survival times and the various regressors are measured at discrete points in time. The discrete-time hazard model is used as an empirical framework for analysing the deterioration process leading to loan default and as a tool for prediction of the same event. Results show that the prediction accuracy of the duration model is better than that provided by a single period logistic model. The predictive power of the discrete time survival analysis is enhanced when it is extended to allow for unobserved individual heterogeneity (frailty).

Defaulted retail mortgage loans as a percentage of retail mortgage loans and advances averaged 9 percent over 2010 as reported in the SARB Bank Supervision Annual report. Banks are in the business of risk taking and as a result need to constantly evaluate and review credit risk management to attain sustained profitability. In credit risk modelling, default risk is associated with client-specific factors particularly the client’s credit rating. However, Brent, Kelly, Lindsey-Taliefero, and Price (2011), have shown that variation in mortgage delinquencies reflect changes in general macroeconomic conditions. This study aims to provide evidence of whether macroeconomic factors such as the house price index, CPI, credit growth, debt to income ratio, prime interest rates, and unemployment, are key drivers of residential mortgage delinquencies and default in South Africa. In this study, data from an undisclosed bank is used to estimate three models that are supposed to capture the influence of several macroeconomic variables on 30 day, 60 day, and 90 day delinquency rates over the 2006-2010 period. In order to eliminate the potential bias introduced by those observations, a fourth model was estimated using aggregated banking industry published by the SARB. However, due to data constraints, only the severe mortgage delinquency state, that is the 90 day delinquency rate was modelled using this aggregate data. The SARB sample covers the period between 2008 and 2010. The choice of the date 2008 coincides with the introduction of the Basel 2 regulatory framework. Prior to 2008, the big four South African banks were governed by the Basel 1 framework, and measured their credit risk using the so-called Standardised Approach which has different loan categories and different default definitions compared to the Basel 2 Advanced Internal Ratings Approach adopted in 2008. The findings suggest that the two samples (i.e. the data from the individual bank and the SARB data) imply different explanatory macroeconomic factors. Prime interest rates were found to be the only important variable in determining 30 day and 60 day delinquency rates for the individual bank. The house price index, CPI, credit growth, and prime interest rates were found to be the main determinants of the 90 day delinquency rates for the undisclosed bank, while the house price index, CPI, and credit growth, determine the 90 day delinquency rates for the big four banks.

The National Credit Act (NCA) was promulgated and implemented on 1 June 2007. The purpose of this research study was to outline the residential mort-gage market in South Africa in the context of the NCA and to determine how residential mortgage lending under the new NCA was regulated. The purpose of the NCA was to remove the many unfair practices, inappropriate disclosure and anti-competitive practices from the market and to achieve honesty in the credit market. Low-income groups were held back because they could not gain access to formal finance to build or improve houses or supplement housing subsidies to get bigger houses. This study applied the quantitative research design using time series secondary data. Registered data on monthly residential mortgages was obtained from Lightstone Property for the period January 2001 to August 2011. Secondary data was collected from the BA900 of the SARB to see how many loans were approved and rejected between 2008 and 2014. The statistical analysis techniques used in this study were t-tests, descriptive statistics, trend analysis and correlation analysis. It was found that the NCA had a positive effect on the residential mortgages in SA. / Business Management / M. Com. (Business Management)