Ramgopal Prajapat:

Learnings and Views

CHAID Decision Tree: Reverse Mortgage Loan Termination Example

By: Ram on Dec 11, 2020

Business Context

Reverse Mortgage Loan (RML) enables Senior Citizens to avail of periodical payments from a lender against the mortgage of his/her house to supplement their income while remaining the owner and occupying the house. Interest on the payments availed will be accumulated. One of the types of Reverse mortgage is Home Equity Conversion Mortgage (HECM), insured by the Federal Housing Administration (FHA) and constituting over 90% of all reverse mortgage loans originated in the U.S. market.

“A HECM loan is terminated when the borrower dies or permanently moves out of the house. Understanding termination outcomes of HECM loans is essential for the FHA insurance program and the long-term viability of the HECM program”(2) The data is downloaded from HUD.GOV website(3).

All loans originated in 2003 and 2004 are considered for the below example. If the termination date is populated, the HECM loan is considered close. The age and Gender of borrowers are used below examples to illustrate the Decision Tree Building process.

CHAID Algorithm(1)

Process Steps

Step 1: Find best split for each Predictor or Independent Variable by merging categories of the Predictor variable

Step 2: Compare Predictor Variables and select the best variable for the node and split the node into two child nodes

Step 3: Continue Step 1 and Step 2 for each of the new nodes until satisfying the stopping criteria.

 

Detailed work out an example of Decision Tree building using CHAID

 

References

1. G.V.Kass, An exploratory technique for investigating large quantities of categorical data, Applied Statistics

2. Tonja Bowen Bishop , Hui Shan , Reverse Mortgages: A Closer Look at HECM Loans

3. http://portal.hud.gov

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