Credit scoring in mortgage lending: evidence from China

Abstract

Purpose

This paper aims to investigate the determinants of default mortgage in China and the factors affecting the mortgage amount granted by Chinese banks.

Design/methodology/approach

This paper employs the credit scoring model to investigate the determinants of default mortgage in China and the factors affecting the mortgage amount granted by Chinese banks.

Findings

Using a proprietary dataset from branches of the Construction Bank of China containing information on all mortgages offered to borrowers from 2004 to 2009 1st quarter, the paper documents that borrower rating, mortgage rate and mortgage duration are significantly related to default rate and mortgage amount. These findings suggest that Chinese banks' mortgage lending are based on commercial basis. This helps to reduce the likelihood of a real estate bubble in China.

Research limitations/implications

The findings in this paper argued that a good credit scoring model has the ability to detect bad loans; this could help the bank to reduce the loan losses from loan default. Consequently, it can improve the profitability and the financial stability of the bank.

Originality/value

This research would benefit both lender and borrowers. Lenders can apply an objective evaluation technique with a standard process and criteria to appraise their customer's credit risks and creditworthiness. A good credit risk management tool can effectively control risk selection, manage credit losses, evaluate new loan programs, improve loan approval processing time, and ensure that existing credit criteria are sound and consistently applied.

Citation

Gan, C., Li, Z., Wang, W. and Kao, B. (2012), "Credit scoring in mortgage lending: evidence from China", International Journal of Housing Markets and Analysis, Vol. 5 No. 4, pp. 334-350. https://doi.org/10.1108/17538271211268457