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Articles Tagged with: Credit Analytics

Managing Operational and Credit Risk in Mortgage Servicing Portfolios During the COVID-19 Crisis

Tomorrow (April 1st) is the due date of the first significant wave of mortgage payments since the Coronavirus began disrupting the economy. The operational impact of COVID-19 on mortgage bankers—and servicers in particular—has been swift and dramatic. It will not soon subside. Its financial impact remains on the horizon but is likely to be felt over a more extended period. 

Whereas borrower inquiries related to the Coronavirus accounted for zero percent of servicer call volume as recently as March 16th, within a week they have spiked to more than 25 percent of inquiries at one servicer. Another servicer reported receiving over 20,000 calls relating to forbearance relief during the same period. 

We are officially in a new world. The next several months appear to hold chaos, disruption, and potentially devastating losses for mortgage servicers. When delinquencies associated with April 1st payments start to hit, the financial impact—felt primarily through P&I, T&I, and corporate advances, additional collection and compliance costs, and the loss of servicing fee income simply because fewer payments are being made—has the potential to linger considerably longer than the liquidity and funding crisis currently rocking financial markets.    

Having a roadmap for navigating impending financial, credit, and operational dilemmas has never been more important.   

Market dislocations created by the speed and seriousness of COVID-19 are constraining (and will continue to constrain) servicers’ tools for responding to and resolving a forthcoming tsunami of delinquencies, foreclosures and REOs. The ability of servicers to manage through this will be further complicated by external factors that will dictate when and how servicers will be able to manage their businesses. These are likely to include various forms of government intervention, such as payment holidays, mandatory forbearance, foreclosure moratoriums, and modification programs. While protecting borrowers, these programs will also add layers of complexity into servicer compliance operations. 

In addition to introducing new sets of moral hazard issues for the servicing of mortgages, increases in delinquencies and illiquidity of trading markets will seize the trading markets for servicing portfolios, limiting mortgage bankers’ access to cash. Investors, guarantors, and insurers will increase their oversight into servicer operations to minimize their losses.  

One Solution 

RiskSpan has been working with its mortgage banking clients to construct a modeling framework for assessing, quantifying, and managing COVID-19 risk to servicing operations and income statements. The framework covers the full lifecycle of a servicing asset and is designed to forecast each of the following under several defined stress scenarios: 

  • Principal and interest advances
  • Escrow (T&I) advances 
  • Corporate advances to cover foreclosure, liquidations and REO expenditures 
  • Financing and capital implications of delinquent and defaulted loans 
  • Repurchases, denials, and rescissions  
  • Compensatory fees and curtailments 

In addition to projecting these financial costs, the modeling framework forecasts the incremental operational costs associated with servicing a portfolio with increasing shares of delinquencies, defaults, bankruptcies, liquidations, and REOs—including all the incremental personnel, compliance and other costs associated with servicing a portfolio that was prime at acquisition but is suddenly beginning to take on subprime characteristics.  

Contact us to talk about how RiskSpan’s operational risk assessment tool can be customized to your servicing portfolio. 


Webinar: CECL – The Requirements & Options For Credit Unions

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CECL – The Requirements & Your Options For Credit Unions

In this webinar, learn from the new current expected credit losses methodology (CECL) experts, David Andrukonis, from RiskSpan, and Graham Dyer, from Grant Thornton about considerations specific to credit unions.

They will cover:

  • Accounting requirements and recent updates from the Financial Accounting Standards Board (FASB) Transition Resource Group
  • Proxy data options with specific data sources for each asset class 
  • Proxy data options with specific data sources for each asset class 


About The Hosts

Dave Andrukonis

Manager – RiskSpan

David Andrukonis has technical and managerial experience in banking, credit risk, and valuation. David leads the development of RiskSpan’s CECL Application, covering a variety of asset classes and model types. He has also led the development of specialized credit risk models such as structural credit risk models for shipping finance. He has performed non-traditional ABS valuations and validated a wide range of financial forecasting models, including models that estimate return on equity, asset/liability valuations under varying market interest rate scenarios, and loan losses.

Prior to joining RiskSpan, he managed the credit risk department at WashingtonFirst Bank, where he developed underwriting methodologies and stress tolerance models for diverse private firms and commercial real estate.

Graham Dyer

Partner – Grant Thornton, Member – FASB’S CECL Transition Resource Group (TRG)

Graham currently consults with Grant Thornton’s clients and audit teams regarding technical accounting and auditing matters, with a focus on issues impacting financial services entities.

His background includes the National Professional Standards Group at Grant Thornton and serving as a Professional Accounting Fellow in the Office of the Chief Accountant at the OCC. Graham is also a member of the FASB’s CECL Transition Resource Group (TRG) and the IASB’s IFRS 9 Impairment Transition Group (ITG).


Webinar: Credit Stress Testing Portfolio Exposure to COVID-19

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Credit Stress Testing Portfolio Exposure to COVID-19

Learn how experienced portfolio managers apply stress scenarios to unprecedented events.

Very few models are built to contemplate the impact of a 20-percent unemployment rate. And those that are don’t have enough data to be trustworthy. 

Building, selecting, and applying appropriate stress scenarios to a portfolio is challenging under the best of circumstances. It becomes even more perilous when people begin applying superlatives like unprecedented, unparalleled, and uncharted. Are we in 2008 again? 2001? The Great Depression? Some combination of all three? No one can really know for sure. 

And so what is a portfolio manager to do? 

Hear Bill Moretti, Faith Schwartz, Scott Carnahan, Amy Crews Cutts, and Bernadette Kogler as they discuss “Stress Testing Portfolio Exposure to COVID-19.” 

Key Topics:  

  • General principles for assessing portfolio risk during a crisis 
  • Identifying an appropriate set of stress scenarios 
  • Concentration and sector-specific risks 


About The Hosts

Bill Moretti

Senior Managing Director

Bill Moretti has over 30 years of experience identifying business opportunities and developing creative investment strategies & solutions for the Structured Finance industry. Bill’s expertise covers all sectors within structured finance including RMBS, Non-Agency RMBS, ABS, CLOs, and CMBS. He is now director and Lead of the SmartLink Innovation Lab.

Amy Crews Cutts

President, AC Cutts and Associates

Amy is President of AC Cutts and Associates, which advises clients on economic trends, public policy, and strategy relating to consumer credit, housing policy, auto lending and mortgage markets. She was formerly Senior Vice President at Equifax, where she was responsible for analytics and research relating micro and macro factors affecting the consumer. Amy has been widely published and quoted both during her time in academia and the private sector.

Faith Schwartz

President, Housing Finace Strategies

Faith Schwartz is the President of Housing Finance Strategies, a strategic advisory services firm. She is active on many industry boards and is known for having developed and led the HOPE NOW Alliance to unite the industry throughout the housing crisis.

Scott Carnahan

Senior Managing Director, FTI Consulting

Scott Carnahan is currently a Senior Managing Director in the Forensic & Litigation Consulting segment at FTI Consulting in Los Angeles. Scott has held leadership positions with Impac Mortgage and KPMG’s accounting, audit, and advisory practice.

Bernadette Kogler

CEO

Bernadette is co-founder, board member, and CEO of RiskSpan. Bernadette is focused on leveraging emerging technology for the advancement of data analytics and business process in the lending and structured finance markets. She is a seasoned executive and has spent most of her career focused on analytics, risk management and technology applications. Bernadette was previously with KPMG’s Mortgage and Structured Finance Practice and started her career with Prudential Insurance Company.


Webinar: How Peers are Tackling CECL for Held-to-Maturity Securities

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How Peers are Tackling CECL for Held-to-Maturity Securities

Join experts from RiskSpan and Grant Thornton to learn about the new current expected credit loss standard (CECL) and it’s implications for held-to-maturity securities.

In this webinar, they will:

  • Identify defining major classes in the debt securities universe including structured-finance, corporate bonds and MUNI bonds.
  • Introduce CECL approaches for these classes, looking at both advanced and simpler approaches
  • Apply the general CECL model to debt securities and look at the impact on pooling and zero credit losses


About The Hosts

Dave Andrukonis

Director – RiskSpan

David Andrukonis, CFA leads RiskSpan’s banking line of business, which helps lending institutions efficiently measure, optimize, and report the risk in their portfolios. Formerly, David managed the credit risk analyst group at WashingtonFirst Bank, covering CRE, construction, C&I and residential portfolios. David has published three technical papers in the RMA Journal and is a CFA Charterholder.

Graham Dyer

Partner – Grant Thornton, Member – FASB’S CECL Transition Resource Group (TRG)

Graham Dyer currently consults with Grant Thornton’s clients and audit teams regarding technical accounting and auditing matters, with a focus on issues impacting financial services entities. His background includes the National Professional Standards Group at Grant Thornton and serving as a Professional Accounting Fellow in the Office of the Chief Accountant at the OCC. Graham is also a member of the FASB’s CECL Transition Resource Group (TRG) and the IASB’s IFRS 9 Impairment Transition Group (ITG).

Varum Agaewal

Director, Strategic Risk and Operations Practice, Financial Services

Varun Agarwal provides advisory services to Banking and Capital Markets clients in risk and regulatory compliance management space in the areas of Enterprise Risk, Credit Risk, Market Risk, Liquidity Risk, Operational Risk and Model Risk management services along with Risk Governance, Risk Data Management and Reporting services.


Webinar: Mortgage Insurance and CECL Presented by MGIC with RiskSpan

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Mortgage Insurance and CECL – Presented by MGIC with RiskSpan

Mortgage insurance is typically purchased to protect mortgage investors from credit risk. Under the new “Current Expected Credit Loss” (CECL) accounting standard, mortgage insurance provides a secondary benefit: a lower allowance for credit losses.

This webinar will:

  • Quantify the impact of MI on CECL under a range of macroeconomic scenarios
  • Introduce a way of measuring MI “value” in a CECL context, namely, a premium-to-allowance reduction ratio
  • Under a mainstream set of macroeconomic assumptions, analyze various coverage levels to search for best value


Webinar: Practical Approaches for Debt Securities Accounting

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Practical Approaches for Debt Securities Accounting

Join RiskSpan allowance expert David Andrukonis for lessons learned from early Current Expected Credit Loss standard (CECL) adopters. 2020 CECL adopters are ready for the new loan accounting, but many are scrambling to meet the new requirements for their HTM and AFS debt securities.

This session will give you:

  • Concrete, practical approaches to solve for HTM and AFS credit loss accounting – approaches that can still be implemented in time for the 2020 adoption deadline and parallel runs
  • CECL implementation experiences from small banks up to $150bn firms, with both 2020 and 2023 implementation dates
  • Solutions for all security types, across a range of budgets
  • Q&A with the host, David Andrukonis


About The Hosts

David Andrukonis, CFA

Managing Director

David Andrukonis has technical and managerial experience in banking, credit risk, and valuation. At RiskSpan, David performs non-traditional ABS valuations and has validated a wide range of financial forecasting models, including models that estimate return on equity, capital levels, asset/liability valuations, and loan losses.



Webinar: Estimating Credit Losses in the COVID-19 Pandemic

webinar

Estimating Credit Losses in the COVID-19 Pandemic

Business-as-usual macroeconomic scenarios that seemed sensible a few months ago are now obviously incorrect. Off-the-shelf models likely need enhancements. How can institutions adapt? 

In this webinar, we will discuss:   

  • How to incorporate COVID-19-driven macroeconomic scenarios in an allowance model (for CECL and OTTI attributions)
  • Making necessary enhancements and tunings to credit and prepayment models
  • Model overrides and user-defined scenarios
  • Situations in which management “Q-factor” or qualitative adjustments may be called for



Understanding the Impact of Federal Reserve Emergency Rate Cuts

Disruptions to the U.S. and global economy brought about by COVID-19 have prompted the Federal Reserve to take a number of emergency measures. These include twice cutting the federal funds rate (to near zero), resuming its purchase of securities, and temporarily relaxing regulatory capital and liquidity requirements (among several other things).  

Although the Fed’s actions take many forms, few things capture investors’ attention in the way emergency rate cuts do. Predicting how financial markets will respond to these cuts is a complicated undertaking. To help investors analyze how these events have affected markets historically, RiskSpan has developed a tool to help investors visualize how various market indices, commodities, currencies and bond yields have reacted to emergency Fed rate cuts in the wake of various market shocks. 

Analyzing events in this way enables investors to more effectively manage their portfolio risk by monitoring market–moving events and identifying response patterns. We analyze a range of past market events to formulate scenarios for RiskSpan’s RiskDynamics market risk service. 

Every crisis is unique, of course. But the Fed’s interest rate cuts this month are specifically reminiscent of seven actions it has taken in response to past economic threats, including the Russian Ruble crisis (2014), the bursting of the dot-com bubble (2000), the September 11th attacks (2001), and the subprime mortgage/Lehman Brothers collapse (2008). 

The chart below compares the response of the S&P 500 to the Lehman collapse and COVID-19 and how long it takes the ensuing Fed rate cut to affect the market. The similarity in the shape of these two curves is quite striking. It also reflects the time required for Congress to pass stimulus following Fed action. 

federal reserve impact shown in RS Edge

The tool displays the performance of several markets across three asset classes in response to each of the seven Fed cuts. In this version we have included stocks, rates and commodities. The two interactive charts specifically help to visualize the following: 

  1. Performance of asset classes from 20 days before through 60 days following each rate cut. 
  2. Performance indexed to the event date—helping to illustrate market conditions leading up to the rate cut and its subsequent impact. 
  3. Daily returns enabling a cross-sector, cross-market comparisons to each rate cut. 

Additional patterns also emerge when looking at how markets have responded to these seven prior cuts: 

  • Equity market collapses tend to stall, but the recovery (if any) is slow. 
  • The volatility index stabilizes, but it takes time to mean revert. 
  • Treasury bonds generally perform better than other asset classes. Long–dated bonds don’t perform as well. 
  • Crude oil continues to sell off in most cases. 

We are continually expanding the list of asset classes and events covered by the tool. Our data science team is also working some interesting analytics for publication.  

We welcome your feedback and requests for additional analysis. Please contact us to discuss further. 


¹ In 2011-12, the market saw significant differences in buyout behavior, for example Bank of America was slow to buy out delinquent loans.

² On Bloomberg, the delinquency states 90 days onward are compressed into a single 90+ state.


Visualizing a CMBS Portfolio’s Exposure to COVID-19

he economic impact of the Coronavirus outbreak is all but certain to be felt by CMBS investors. The only real uncertainty surrounds when missed rent payments will begin, what industries are likely to feel them most acutely, and—more to the point—how your portfolio aligns with these eventualities.

The dashboard below—created using RS Edge and Tableau—displays a stylized example compiling small random excerpts from several CMBS portfolios. While business disruptions have not (yet) lasted long enough to be reflected in CMBS default rates, visualizing portfolios in this way provides a powerful tool for zeroing in on where problems are most likely to emerge.

The maps at the top of the dashboard juxtapose the portfolio’s geographic concentration with states where COVID-19 prevalence is highest. Investors are able to drill down not only into individual states but into individual NAICS-defined industries that the loans in their deals cover.

At each level of analysis (overall, by state, or by industry) the dashboard not only reports total exposure in UPB but also important risk metrics around the portfolio’s DSCR and LTV, thus enabling investors to quickly visualize how much cushion the underlying loans have to absorb missed rent payments before the deals begin to experience losses.

COVID-19-portfolio-exposure-in-RS-Edge

The real value of visualizations like these, of course, is the limitlessness of their flexibility and their applicability to any market sector.

We sincerely desire to be helpful during these unprecedented market conditions. Our teams are actively helping clients to manage through them. Whether you are looking for historical context, market analysis or just a conversation with folks who have been through several market cycles, we are here to provide support. Please contact us to talk about what we can do for you.


Managing Coronavirus-Related Risks in Aircraft Lease ABS

Last week, UK airline Flybe grounded its planes, stranded passengers and filed for bankruptcy protection, as the struggling carrier was buffeted by a Coronavirus-related slowdown in demand. Flybe’s demise is a trenchant example of the implications of Coronavirus for investors in the aircraft sector, including aircraft lease ABS investors whose cash flow depends on continued lease payments from various global carriers. Of course, the impacts of Coronavirus will vary, with some countries, servicers, credit-rating sectors and deal structures worse off than others. Using RS Edge, aircraft lease ABS investors can drill down into collateral to see country, carrier and aircraft exposures, stress test deals and learn potential fault lines for deals as Coronavirus uncertainty looms. 

The snapshot below illustrates how clients can benefit from RiskSpan and Intex data and analysis in this sector. Using its embedded Tableau functionality, RS Edge can quickly show investors the top country, carrier and aircraft exposures for each deal. Investors concerned about carriers that might be increasingly vulnerable to Coronavirus disruption (such as Italian or Asian airlines today and likely others in coming weeks) can determine the exposure to these countries using the platform. In addition, when news is announced that impacts the credit quality of carriers, investors can view exposure to these carriers and, with additional analysis, calculate the potential residual value of individual aircraft if the carrier goes bankrupt or the lease terminates. RiskSpan can also provide data on exposure to aircraft manufacturers and provide valuation of bonds backed by aircraft leases.  

abs-aircraft-sector-analysis

Contact us to learn more about how RiskSpan helps clients manage their airline (and other risk) exposure and how we can assist with customized requests to perform further analysis requiring add-on data or calculations.


   

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