Valuation of Credit Risk in Agricultural Mortgages

A credit-risk valuation model is developed and empirically implemented to estimate the cost of insuring against credit risks in pools of agricultural mortgage loans. Probabilistic information about loss distributions across a broad set of loan-level and pool-level characteristics is used to assess insurance valuation and solvency likelihood. The effects on the value of credit-risk insurance of pool size, deductibles, timing alterations, premium loadings, adverse loan selection, and changing underwriting standards are also estimated. Results indicate that actuarial insurance costs are initially highly sensitive and then become relatively insensitive as pool size increases.