Affordability Capacity Measures

Some research exists on tests for affordability measure for
predicting credit problems in the credit risk literature.
Wilkinson and Tingay (2002) report that affordability does
marginally add to the lending decision using a comparison
of the performance of credit score models (with and without
affordability measures for personal loans) . Although this
research is useful, an affordability test for personal credit
usage is definitely not of the same scale as one for home
mortgages―a sizable difference in both scope and end
outcome. In addition, research by Russell (2005) shows
clever use supplements their Delphi bureau score to deliver richer
of a bureau Affordability Index (AI) that.
selection criteria and strategy. This is an example of a top-
down measurement of affordability. Another available external
measure is the over-indebtedness (OI) index provided by the
Callcredit bureau that helps identify any serial credit card
users or applicants who have very large or insurmountable
debt accumulation. This useful measure of personal debt is
truly global in nature and hence provides additional evidence
of ‗true‘ affordability for the mortgage application in hand.
Since mortgage regulation in October 2004, there has been a
greater onus on lenders to demonstrate responsible lending to
ensure that Therefore, it has become a mandatory requirement that each
lender now shows evidence of an individual applicant's ability
to repay. According to Van Dijk and Garga (2006), lenders
active in the sub-prime market are more likely to use an
affordability model than lenders in the prime market. They see
this trend as not that surprising, given that applications within
the sub-prime market are more likely to be o f higher risk, thus
warranting applicant can truly afford the mortgage.
With Capacity PD measures, it is possible to use either an
internal or an external measurement. One form of an internal
measure would be from the application of a suitable mortgage
affordability calculator. The main purpose for the construction
of an affordability calculator would be to help any lender
better comply with mortgage regulation requirements including
that of being a responsible lend er. Responsible lending
mandates that applicants are genuinely able to service their
loan obligations.Perhaps what is required from the regulators though, in the
future, is for an industry-wide standard on what constitutes
true affordability for a loan. For example, a cursory website
examination affordability calculators indicates that considerable variation
exists amongst the maximum possible loan, given similar input
variables.they are a more detailed of several