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The risk of an institution financing mortgage loans means a possibility of facing difficulties in receiving payments on time. When setting up a credit risk management policy for mortgage loans, a bank should start with describing conditions and rules for identification, measurement and monitoring of the credit risk. The primary criteria for risk identification are income and loan payment relation, value of mortgage loan collateral (property) and economic environment during the term of the loan.

Having such an analysis banks are or would be using a tool, which would allow them to automate credibility valuation, as well as automate collateral valuation and loan terms. Scoring cards are such a data generation tool. Introducing scoring methodology requires fulfilling some of the basic conditions. One of these conditions is probability of default. To value it, internal and external statistical data is required. Giving a customer the specified attributes and using statistical methods of analysis, the bank is able to determine with large probability whether - and to what extend - is exposed to risk. The second important condition is possibility of using data base related to value of mortgage loan collateral. Dropping or increasing value of a property in loan term has direct influence on customer behavior.

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Krzysztof Jajuga

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