Zeroing in on loan-level risk these days involves a process that essentially aims to reverse-engineer the underwriting problems that caused the recent downturn as market participants, particularly those with a stake in the distressed product space, have increasingly focused on collateral valuations at the micro-market level.
“Sometimes they’ll get very granular within the home price,” said Jonah Green, head of mortgage analytics, consulting and new business development at 1010data, New York. “The equity estimates could vary. They’ll look at sort of delinquency status of other loans in the region.
“For example, if delinquencies are ticking up in general in that…area that…indicates the neighborhood is more distressed than, say, some other neighborhood and that might mean future home prices are going to continue to, if they’ve been dropping, go down further.”
Green said market participants may use different sources for analysis, but there are some core factors that generally are examined, including the delinquency status/history of the loan, home price movement in the specific region the loan is in, and the delinquency status of other loans in the area.
The last factor has become important to examine because, “if a loan, for example, has been current…but other loans from that same ZIP code…have been delinquent, that loan is probably more risky than a loan in another area that is always current where other loans tend to be current as well,” Green said.
“If there are fewer delinquent borrowers it could mean the local unemployment rate is better,” he said. “So people are looking at the delinquency status of the loan itself as well as the delinquency status of other loans in the area.”
“They’re also looking at the size of the loan,” he added, noting that this is examined in private-label deals in an effort to evaluate whether the loan is eligible to be refinanced through a government program. The interest rate of the loan relative to where the borrower could potentially refinance through a government program also gets examined.
“Another variable people look at is modifications,” Green added.
“Sometimes loans may be current and modified,” he explained. “So don’t assume necessarily that all delinquent loans the loan has to be delinquent before it’s modified. Frequently that is the case, but if…it’s current but it’s been modified, that means the borrower has some stress and got a modification. So an investor may look at that negatively.”
Market participants are increasingly making efforts to combine these factors in their analysis, said Green, whose company provide a data platform for these efforts.
“You don’t want to just want to look at other loans in the ZIP code, you want to look at a certain cohort, let’s say within a ZIP code or within a MSA. Those types of analyses are kind of tricky require a lot of ad hoc analyses on millions of loans,” he said.
“You might say 20% of loans that are $100,000-$200,000 are delinquent but 50% of loans that are $500,000-$750,000 are delinquent and the loan [the market participant] is looking at happens to be a jumbo loan that’s $550,000. So you may need a complicated query in that to determine that loan’s risk.”
This sort of analysis is primarily done on existing and often distressed private-label product, but it has implications for the evaluation of loan level risk on new production, which may be done on more of an ongoing basis going forward.
“Forever, when you originated a loan, there was no mechanism to keep updated borrower information, but it’s clear over time the information gets stale,” noted Frank Pallotta, executive vice president at Loan Value Group, Rumson, N.J.
“In a new origination clearly the incentive is the downpayment, the borrower puts down but you need to keep the borrower continually engaged. But in the worst case, if home prices begin to come down a lot, you also need to make sure that you’re in front of the borrower with a number of different strategies: cross-sell opportunities, refinance opportunities.” This is something Pallotta said some are considering doing through programs that can continue to incent borrower to pay and stay in touch with their lender/servicer even when equity is lacking.
The possibility that borrowers without incentive might walk away from their homes and loans without paying is also increasingly a part of evaluations of loan level risk on pre-existing product said Guy Taylor, chief executive officer at Equi-Trax Asset Solutions LP, Santa Barbara, Calif.
“I’m hearing a lot more of that from the standpoint of really trying to identify strategic defaults in MSAs where there might be a higher propensity for strategic default just due to the fact that if you have underwater mortgages, you have high unemployment and you have a high level of REO in that particular area,” he said, noting that market participants have been increasingly working to tie all these data points together “to create some type of trend and project some type of trend around what percentage of those homes may go into foreclosure and or into default over a certain period of time going forward.”
So they’ll look at those, putting together different data points, and then trending back to look forward.”
