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Articles Tagged with: Credit Analytics

RiskSpan VQI: Current Underwriting Standards – March 2020

riskspan-VQI-report-March-2020

The RiskSpan Vintage Quality Index (“VQI”) indicates that we are entering the current economic downturn with a cohort of mortgages that were far more conservatively originated than the mortgages in the years leading up to the 2008 crisis. The VQI dropped three points for mortgages originated during March to finish the first quarter of 2020 at 87.77. This reflects generally tight underwriting standards leading into the COVID-19 crisis, though not nearly as tight as what was witnessed in the years immediately following the housing finance crisis.  

The VQI climbed slightly during the first two months of the year—evidencing a mild loosening in underwriting standards—peaking at just over 90 in February, before dropping to its current level in March. The following chart illustrates the historical trend of risk layering that contributes to the VQI and how that layering has evolved over time. Mortgages with one borrower—now accounting for more than 50 percent of originations—remain a consistent and important driver of the index and continued to climb during Q1. High-DTI loans, which edged higher in Q1, continue to drive the index today but not nearly to the degree they did in the years leading up to the 2008 crisis.  

riskspan-VQI-report

RiskSpan introduced the VQI in 2015 as a way of quantifying the underwriting environment of a particular vintage of mortgage originations. The idea is to provide credit modelers a way of controlling for a particular vintage’s underwriting standards, which tend to shift over time. The VQI is a function of the average number of risk layers associated with a loan originated during a given month. It is computed using:

  1. The loan-level historical data released by the GSEs in support of Credit Risk Transfer initiatives (CRT data) for months prior to December 2005, and
  2. Loan-level disclosure data supporting MBS issuances through today.

The value is then normalized to assign January 1, 2003 an index value of 100. The peak of the index, a value of 139 in December 2007, indicates that loans issued in that month had an average risk layer factor 39% greater (i.e., loans issued that month were 39% riskier) than loans originated during 2003. In other words, lower VQI values indicate tighter underwriting standards (and vice-versa).

Build-Up of VQI

The following chart illustrates how each of the following risk layers contributes to the overall VQI:

  • Loans with low credit scores (FICO scores below 660)
  • Loans with high loan-to-value ratios (over 80 percent)
  • Loans with subordinate liens
  • Loans with only one borrower
  • Cash-out refinance loans
  • Loans secured by multi-unit properties
  • Loans secured by investment properties
  • Loans with high debt-to-income ratios (over 45%)
  • Loans underwritten based on reduced documentation
  • Adjustable rate loans
FICO less than 660
DTI greater than 45
adjustable rate share
cashout refinance
loan occupancy
one borrower loans

Modeling Delinquency Deluge

RiskSpan’s CEO Bernadette Kogler recently spoke with Simon Boughey of Structured Credit Investor (SCI) to discuss COVIDー19’s impact on the mortgage market & securitizations of mortgage assets. Simon’s article has been republished here with their permission.


Wednesday 8 April 2020 17:45 London/ 12.45 New York/ 01.45 (+ 1 day) Tokyo

Mortgage market advisers and consultants are struggling to find any models that work for the current crisis, but they are telling clients that they should prepare for a worst case scenario in mortgage market and securitizations of mortgage assets.

“Our clients are modeling a range of scenarios but are preparing themselves for the worst case including sustained levels of unemployment. Hopefully it won’t be that bad, but they need to prepare themselves,” says Bernadette Kogler, Chief Executive Officer of RiskSpan, a Washington, DC-based analytics and modeling firm which has particular expertise in mortgage markets.

RiskSpan clients include firms prominent in the mortgage securitization industry, such as lenders and servicers like Wells Fargo and Flagstar, as well as Fannie Mae and Freddie Mac. It also has clients on the buy-side, such as Barings, Northern Trust and Fidelity.

Both buy-side and sell-side clients are struggling to assess what the economic devastation of the last two weeks, with more to come, will mean for the MBS markets.

The “worst case” could be very bleak indeed. Economists at the Federal Reserve Bank of St Louis have predicted that the dislocation elicited by COVID-19 could cause 47M job losses in the US. This translates to an unemployment rate of 32% – comfortably worse than the rate of 25% recorded in the Great Depression of 1930-33.

Other economists are not quite so pessimistic, but Kogler agrees and she is advising clients to prepare for an unemployment rate of 30% in the worst affected regions of the USA. Las Vegas, Nevada, for example, is particularly exposed to the collapse of the hospitality industry, while Texas has been hit with a double whammy of a Coronavirus lockdown and a precipitous decline of oil and gas prices.

Metropolitan Las Vegas has a population of over 2.5M while the state of Texas is home to over 12.5M people.

An unemployment rate of 30% could lead to a mortgage delinquency rate of around 30%. Data provided by the Bureau of Labor shows that the correlation between unemployment and mortgage delinquency is very high – virtually 1:1. So, for example, both unemployment and mortgage delinquency peaked at around 10% in the Great Recession.

mortgage delinquency rate and unemployment rare

At the moment, a delinquency rate of 10% looks a lot better than what might be seen in a few months from now. Of course, foreclosure rates will be substantially lower than delinquencies, but if delinquencies do hit 30% foreclosures might be as high as 30%. The effect on the MBS market, both agency and non-agency, of delinquency rates of this magnitude is hard to over-estimate.

Kogler suggests that around 1M Federal Housing Authority (FHA) loans could be affected by unemployment levels like that.

The GSEs, of course, offer largely guaranteed debt to capital markets investors in the TBA market, so their position could become particularly painful.

On January 23, when COVID-19 was still something to be not too bothered about, Federal Housing Finance Authority (FHFA) director Mark Calabria gave a speech to National Association of Homebuilders and reminded his audience that Fannie Mae and Freddie Mac had a leverage ratio of 300 to 1.

“Given their risks and financial position, even in a modest downturn, Fannie and Freddie will fail,” he said.

Part of the problem in modeling for a disaster of this proportion is that there are still many unknowns. Though the Federal Reserve has intervened with a stimulus package, but no-one knows how much it will continue to do, or can do, as the crisis persists.

Certain areas of the mortgage industry are still without any Federal aid. Mortgage originators and servicers hope to receive some backing, but nothing has been divulged as yet.

Models based on natural disasters provide no firm clue about this crisis will unfold. In disasters of that kind, insurance companies intervene at some juncture, distorting the appropriateness of disaster-based models for the COVID-19 world.

“No models are sufficient. Predictive models are based on historical data, and to the extent that we have not seen anything like this before they are not going to work,” says Kogler.

Simon Boughey

08/04/2020 17:45:18

Copyright © structuredcreditinvestor.com 2007-2019.

This article was published in Structured Credit Investor on 08 April 2020.

Structured Credit Investor

Modeling Credit and the Impact of COVID-19

Notwithstanding action taken at every level of government (including emergency measures taken by the Federal Reserve) to attempt to limit the economic fallout of the COVID-19 pandemic, markets remain highly volatile. How loans and structured credit are modeled needs to be modified (and quickly) to reflect the emerging expectations, moral hazard, and risks from the current crisis. 

 In the consumer finance market, existing models and data for the primary, secondary, and tertiary markets are strong, but these have a high probability of performing poorly as they’re based on historic data that doesn’t reflect the current crisis. To address this issue, RiskSpan has created a top–down framework that incorporates data from select historical events as well as a user-defined view of macro-economic forecasts. 

A Framework for Modeling Mortgage Credit in COVID-19

Compile data from past catastrophes 

The basis of our approach continues to be data-driven as historic events can serve as data points to inform analysis for the current crisis. Relevant catastrophes to look upon include: 

  • Natural disasters, including Hurricane Katrina and the impact on regional economies 
  • The Great Recession and its impact on certain borrowers 
  • The federal government’s response to the Great Recession 
  • The Great Depression  
  • Federal Reserve Board stress tests  

These events can inform some part of the modeling framework for key performance drivers, including: 1) unemployment and short-term delinquencies, 2) government relief programs, 3) default and foreclosure, and 4) home price changes and losses to investors. 

UNEMPLOYMENT AND MORTGAGE DELINQUENCIES  

The impact of unemployment on mortgage delinquencies will be severe. As the graph below shows, the relationship between unemployment and delinquencies is highly correlated—a nearly 1:1 relationship.  

We further expect that unemployment and subsequent delinquencies will correlate to regional, state, or business sector unemployment. Certain industries are more susceptible to COVID-19 related disruption stemming from the decline of consumer demand, state and federal orders, and international government actions that affect tourism. Further, state–level executive orders and COVID-19 responses have been inconsistent—some state orders are more severe than others. This will lead to a corresponding impact at the state versus federal level and highlights the importance of taking geo-specific macroeconomic factors into account.  

Economic forecasts of unemployment related to the current crisis vary widely so we look to past levels to inform possible boundaries. During the Great Recession, nearly 9 million people lost their jobs within one year leading to an unemployment rate of 10%, according to the BLS. In contrast, new unemployment claims spiked on March 26, 2020, to 3.28 million according to the Labor Department, and then to an astounding 6.6 million today. These figures far exceed the previous high of 665,000 claims during the Great Recession. The Great Depression can also serve as a benchmark when unemployment peaked at 24.9% in 1933. This can be particularly relevant for certain geographies or industries. The Federal Reserve 2020 Severely Adverse Scenario, with unemployment peaking at 10% in 2021, suddenly looks more akin to a base or optimistic scenario.  

GOVERNMENT RELIEF AND DELINQUENCIES  

The national scope of COVID-19 is forcing governments and mortgage guarantors into nationwide mortgage forbearance, foreclosure moratoriums, and government relief programs. Regardless of type or reason, mortgage non-payment will result in a peak in delinquencies which may remain elevated through a forbearance period. 

We can look to natural disasters, like New Orleans and Puerto Rico hurricanes and the Houston floods, to find dramatic and immediate spikes in delinquencies. However, these natural disasters did not result in a corresponding spike in serious mortgages delinquencies or defaults. In these examples, forbearance and moratorium programs provided relief to borrowers until insurance companies paid claims. 

 

SERIOUSLY DELINQUENT AND DEFAULT  

As the table below shows, the Great Recession produced multiyear elevated delinquency and default rates with delinquencies spiking at near 10% in 2010. Peak default rates for some private investor programs exceeded 40%. 

 However, mortgage defaults from the Great Recession included the impact of aggressively expanded underwriting with rampant and unfettered fraud in the form of subprime and NINA (No Income No Assets) mortgage programs. The historical trend of RiskSpan’s Vintage Quality Index reflects the degree to which underwriting guidelines have generally tightened and steadied over the past decade.  

 Efforts to reduce default rates during the 2008 financial crisis were further hampered by initially slow government responses and uncoordinated efforts between investors and federal and state agencies. In the current crisis, we can expect government responses to COVID-19 to be immediate, aggressive, and coordinated. The U.S. federal government has already enacted relief legislation, recognizing that forbearance, loan modifications, and moratoriums are all proven tools to reduce mortgage delinquencies and severities. Unlike in 2008, however, the mortgages impacted by the current crisis are primarily federally insured and likely skewed towards low–income and low–FICO borrowers. Because federally insured mortgages tend to find their way into Ginnie Mae MBS, emerging issues relating to advances on those securities may require new and unproven programs. 

HOME PRICES

The residential real estate market was strong prior to the pandemic. Home sales in February rose 6.5% to 5.77 million, according to the National Association of Realtors, and median home prices rose 8.0% year-over-year. As COVID-19 spreads, new sales activity is already coming to a halt, yet the impact on HPA is uncertain. A review of natural disasters, such as the Houston and Louisiana hurricanes, shows little negative long–term impact on HPA after the events. By comparison, the Great Recession produced nationwide declines that did not begin to rebound until 2012 (see below).  

Supporting the argument of a short-term impact on HPA are the recent strength of the U.S. economy and continued discipline in credit lending standards. Further, there is also strong generational demand for housing during a nationwide housing shortage. Arguments for a less optimistic view are based on the potential for a longer-than–expected national economic shutdown and structural impacts to the economy, employment, and industries even after the pandemic ends.  

Summary 

The aphorism “things work until they don’t” is commonly used to explain financial markets and behaviors. The COVID-19 crisis is simply the latest manifestation of this reality. Risk managers and finance executives have to decide whether to rely on current models built on historical events and data – the models that got you here – or to start rethinking and retesting hypotheses and assumptions to manage and quantify new risks.  

 Email us at info@riskspan.com to talk about how RiskSpan can help and click here to see RS Edge in action.


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

webinar

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

webinar

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

webinar

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

webinar

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

webinar

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



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