Breaking Barriers: Micro Mortgage Analytics

Case Questions

Q1 Examine the decision tree in Exhibit 8 and come up with a strategy which Ajay and his
team should adopt to identify creditworthy customers early in the assessment phase.

Q2 Using the classification table in Exhibit 10, answer the below questions:
a) Given 100 loan applicants who have been approved a loan, how many of them would
the model be able to correctly predict as sanctions?
b) Calculate the proportion of actual rejects which have been incorrectly classified as
sanctions.

Q3 Apply the CHAID decision tree on the 100 data points provided in Exhibit 11 and
construct the classification table. (Assume the cut off = 0.8) Is it similar to the one
provided in Exhibit 10? What are your conclusions regarding the CHAID decision tree
results?

Q4 Examine the decision tree in Exhibit 8 and explain why derived variables such as LTV
and FOIR have better explanatory power than the individual variables used to derive
them?

Q5 Using Keerthana’s model in Exhibit 12, assess the statistical significance of a

candidate’s ability to repay the loan. Hint: Assume IAR to be a good proxy for a
candidate’s ability to repay the loan.

Q6 Siddharth had a look at the regression model built by Keerthana and believes that there
could be a better model. Is Siddharth correct? Justify your answer.

Q7 Using Siddharth’s model in Exhibit 13:

a) Compute the odds ratios relating the probability of a sanction associated with a 5%
increase in LTV after adjusting for the other factors.
b) Jamuna currently lives in a rented accommodation in the city of Rewari and she has
applied to Shubham for a home loan. What are her chances of getting a loan sanction
had she not been living in a rented accommodation, keeping all other factors constant?

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Q8 Use the data for two applicants in Exhibit 14 and derive the probability of sanction for
each of them by applying Siddharth’s model.

Q9 Exhibit 15 contains the classification table for the training dataset at different cut off
values.
a) Examine the table and suggest a suitable cut off point for Siddharth’s model.
b) Using the optimal cut off point obtained from above, predict the decisions that
Shubham would take with respect to applicants in Q8.

Q10 Assume that Siddharth’s model (Exhibit 13) is being operationalized by Shubham.
Write the Logit equation and suggest the business strategy that Ajay's team should
adopt to identify creditworthy customers using this model.

Q11 Explain the change in odds ratio for candidates who apply for loans from Tiers 1, 2 and
3 (keeping Tier 3 as the base) with all other factors held constant. Do you see a linear
trend in odds ratio change as you go down from Tier 1 to Tier 3? Explain.

Q12 Using Siddharth’s model, calculate the profit/cost (cost function) for correct and
incorrect decisions during the application processing stage.

(Note: All applicants classified as approved by the model would still be visited by the
credit officer for due diligence whereas applicants classified as rejected by the model
would no longer be considered for further processing. Consider only the loan origination
section from Exhibits 2 and 3).

Q13 Based on the cost function generated above, calculate the optimal cut off value based on
maximizing the profit during the application processing stage.
(1$ = INR 62, in November 2013)