Deep Learning for Mortgage Risk

75 Pages Posted: 23 Jun 2016 Last revised: 22 Nov 2018

See all articles by Justin Sirignano

Justin Sirignano

Imperial College London - Department of Mathematics; University of Illinois at Urbana-Champaign

Apaar Sadhwani

Stanford University

Kay Giesecke

Stanford University - Management Science & Engineering

Date Written: November 20, 2018

Abstract

We examine the behavior of mortgage borrowers over several economic cycles using an unprecedented dataset of origination and monthly performance records for over 120 million mortgages originated across the US between 1995 and 2014. Our deep learning model of multi-period mortgage delinquency, foreclosure, and prepayment risk uncovers the highly nonlinear influence on borrower behavior of an exceptionally broad range of loan-specific and macroeconomic variables down to the zip-code level. In particular, most variables strongly interact. Prepayments involve the greatest nonlinear effects among all events. We demonstrate the significant implications of the nonlinearities for risk management, investment management, and mortgage-backed securities.

Keywords: Deep Learning, Machine Learning, Mortgages, Loans, Credit Risk, Prepayment Risk, Nonlinear Model

Suggested Citation

Sirignano, Justin and Sadhwani, Apaar and Giesecke, Kay, Deep Learning for Mortgage Risk (November 20, 2018). Available at SSRN: https://ssrn.com/abstract=2799443 or http://dx.doi.org/10.2139/ssrn.2799443

Justin Sirignano (Contact Author)

Imperial College London - Department of Mathematics ( email )

South Kensington Campus
Imperial College
LONDON, SW7 2AZ
United Kingdom

HOME PAGE: http://jasirign.github.io

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

Apaar Sadhwani

Stanford University ( email )

Stanford, CA 94305
United States

Kay Giesecke

Stanford University - Management Science & Engineering ( email )

475 Via Ortega
Stanford, CA 94305
United States
(650) 723 9265 (Phone)
(650) 723 1614 (Fax)

HOME PAGE: http://https://giesecke.people.stanford.edu

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