Default, Collateral Risk Models Useful In Mitigating Risk

MBA (3/6/2008 ) Palaparty, Vijay
While automated valuation models provide specific information on properties, loan originators, servicers and the secondary market could benefit further from default and collateral risk models, considering the industry’s heightened focus on mitigating risk.
“Using statistical models, you can make forward projections and this is beneficial to originators in assessing whether to originate or not originate a loan,” said Barry Bates, president and CEO of InsideValuation Inc., Reno, Nev. “For servicers, it could help in the decision of whether to modify a loan, implement a short sale or even a foreclosure. In the secondary market, projections can provide the due diligence necessary to evaluate levels of risk in portfolios.”

InsideValuation offers default and collateral risk modeling through its InsideRisk model, which was recently upgraded to evaluate economic and demographic data. The variables include affordability, unemployment, property crime, violent crime and gross rent multiplier factors, which are categorized by five risk rankings ranging from low, average, elevated, high to very high.

“Measuring economic and demographic data have been shown as reliable predictors of mortgage loan performance,” Bates said. “Much of this data are in the public domain, but requires extensive ‘scrubbing’ in order to refine geographic granularity and update key indicators. InsideRisk evaluates this data and enables lenders to measure and manage the level of risk of originating loans.”

Unlike automated valuation models, which are based on historical data that usually comes from housing indexes, default and collateral risk models project forward based on current information. They provide information that has an outlook of six months to nine months, Bates said. Default rates in addition to median home prices can be projected through these models.

“Ultimately, originators and servicers and even the secondary market, needs to know whether borrowers are going to pay their loans,” Bates said. “Median home prices affect that significantly and a future indicator can help manage risk—forecasting what could happen to help decide how to proceed at each level of the loan cycle.”

To date, the company provides projections at a zip code level but plans on adding more variables to its models for further analysis. “We anticipate eventually being able to assess a specific property’s collateral risk value based on these models,” Bates said. “In the assessment, however, we want to provide an outlook.”

InsideValuation offers its services online, providing information on a one-time basis or through licenses for ongoing access.