  The writers propose a mathematical Method for deriving risk weights which
describe how a borrower's income, relative to their debt service obligations
(serviceability) affects the probability of default of the loan.
  The Method considers the borrower's income not simply as a known quantity at
the time the loan is made, but as an uncertain quantity following a statistical
distribution at some later point in the life of the loan. This allows a
probability to be associated with an income level leading to default, so that
the relative risk associated with different serviceability levels can be
quantified. In a sense, the Method can be thought of as an extension of the
Merton Model to quantities that fail to satisfy Merton's 'critical' assumptions
relating to the efficient markets hypothesis.
  A set of numerical examples of risk weights derived using the Method suggest
that serviceability may be under-represented as a risk factor in many mortgage
credit risk models.
