PROTOTYPE MORTGAGE RISK ASSESSMENT MODEL

Whether lenders opt for the Standardised approach to credit risk or for an Internal Ratings Based IRB approach, ICAAP accounting procedure requires an understanding of the impact of macroeconomic scenarios upon their businesses. The Mortgage Risk Assessment Model M-RAM has been developed by Acadametrics to provide lenders with the ability to use a desktop computer to assess instantly the loss estimates and weighted LGD outcomes available under alternative scenarios for their portfolio as a mirror to the results that can be obtained from the Acadametrics Scenario Analysis service. The model is therefore underpinned by Acadametrics unique historic downturn default data and our University of Cambridge hazard rate methodology. Output is available in print or in Excel format for desktop use. M-RAM would provide a unique means of quickly assessing the implications of portfolio acquisition, sale or securitisation and of the effect of possible changes in marketing policy or strategy under different macroeconomic scenarios. M-RAM is expected to prove a valuable tool for lenders of any size, consultants and insurers.

PROSPECTUS April 2008

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Acadametrics Limited 226 Sheen Lane London SW14 8LD United Kingdom telephone +44 20 8392 9082 fax +44 20 8876 1694 email info@acadametrics.co.uk

Prototype Mortgage Risk Assessment Model Prospectus April 2008 © Acadametrics Limited

ABOUT ACADAMETRICS Acadametrics is a research and consultancy practice. bespoke to lenders’ existing models All Acadametrics services (including the FT House Price Index) have an academic foundation in cutting edge econometrics. Our work on mortgage arrears and possessions began in 1987.co. mortgage arrears and possessions. Our solutions are bespoke to specific client requirements . inter alia. credit cards and unsecured loans. electronic. This work led to our becoming expert in house prices and house price indices. the experience of our team in these subjects is exceptional and the Probability of Loss (PL) and Loss Given Default (LGD) “worst case” data which we possess are unique in coverage and volume. prior to the 1989-1991 “worst case” (to date) recession in the UK housing market. down to individual loan level o desk-top pc tools for analysis of mortgage books o forecasting methodologies to deliver both “point in time” and “through the cycle” PD estimates. pre-payment risk. photocopying. mechanical.some examples of our more widely used solutions are listed below: Monthly valuation series.uk All Rights Reserved No part of this publication may be reproduced. statistics and decision theory and are developed to meet perceived industry needs under the “research first” policy of our consultancy practice. the pricing of mortgage books for sale or purchase and the performance of credit score models for mortgages. Acadametrics cannot accept any liability whatsoever for actions taken based upon any information that may subsequently prove to be incorrect. the accuracy of which we are not always in a position to guarantee. for clients to use in the regular revaluation of property or loan portfolios application of unique. specialising in the housing sector. As a result. recording or otherwise without the prior permission of Acadametrics Limited. stored in a retrieval system or transmitted in any form by any means. The Reader in Financial Econometrics at the University of Cambridge and Fellow of Trinity College. Acadametrics has assisted participants in the housing sector by providing advanced academic research and econometric models concerning. Acadametrics research is led by Dr Stephen Satchell. For many years. Prototype Mortgage Risk Assessment Model Prospectus April 2008 © Acadametrics Limited . historic LGD data for lenders to calibrate risk and capital assessment models validation of risk models a range of predictive default services for mortgage portfolios comprising: o arrears and possession rates at national mortgage book level o revaluation and scenario testing for portfolios and sub-portfolios. The facts of this report are believed to be correct at the time of publication but cannot be guaranteed. conclusions and recommendations that Acadametrics delivers will be based on information gathered in good faith from both primary and secondary sources. As such. Please note that the findings. Further detail is provided on our website www.acadametrics. Our past experience supports much of our current work with lenders with a specific focus upon risk assessment and the needs of the Capital Requirements Directive.

............................................................................................................................................. 1 BACKGROUND.................................................................................................................................................. 2 VALUATION................................................................. 8 Prototype Mortgage Risk Assessment Model Prospectus April 2008 © Acadametrics Limited ...................................................................................................................................................................................................................................... 1 MODEL FEATURES.....................................................................................................................................CONTENTS INTRODUCTION ..................................................................................... 3 WHICH SOLUTION? .............................................................................................................. 7 APPENDIX 3 ................................ 5 APPENDIX 2 .......................................................................................................................................................................... 3 SUBSCRIPTIONS ..................................................................................... 1 DESCRIPTION...................................................................................................................... 2 CALIBRATION ..... 3 APPENDIX 1 ...................................

M-RAM is calibrated with the output from ASA and provides the full benefit of the ASA model at portfolio level. Focused upon the needs of Finance and Credit Risk departments. M-RAM is intended to be both cost effective and easy to use. who has led Acadametrics modelling and default work for the past 18 years) developed our Acadametrics Scenario Analysis (ASA) solution. The output varies by macroeconomic scenario. acquisition or securitisation. As described below. These pre-loaded tables for M-RAM are available at alternative levels of accuracy as may best suit the requirements of the lender. DESCRIPTION The desktop model M-RAM is provided with pre-loaded ASA output tables. developed for us at the University of Cambridge. M-RAM can also be invaluable to Marketing. The ASA model uses both our unique historic downturn default data from the 1989-1991 housing crisis and our Acadametrics House Prices. The standard scenarios employed by the ASA service comprise a resurrection of the 1989-1991 “worst case” (the Basel regulatory Prototype Mortgage Risk Assessment Model Prospectus April 2008 © Acadametrics Limited 1 . including portfolio profitability analysis. Acadametrics prototype desktop Mortgage Risk Assessment Model M-RAM is a flexible tool which provides easy access to the outcomes available from our Acadametrics Scenario Analysis service. hence. This comprises a powerful and flexible tool which is in on-going use by lenders in support of their internal risk management process and waiver applications. The M-RAM output consists of: • • loss estimates comprising the net present value of losses as a result of possession (Probability of Loss PL*Loss Given Default LGD) for years 1. M-RAM is. Dr Stephen Satchell (The Reader in Financial Econometrics at the University of Cambridge. enabling a lender to investigate the impact of macroeconomic scenario and loan book profile changes using summary profiles of their own mortgage data. we can also provide an alternative prototype Mortgage Risk Assessment Service M-RAS comprising a printed report from the M-RAM model. a desktop solution to risk management and reporting requirements. ICAAP accounting procedure requires that they understand the impact of macroeconomic scenarios upon their businesses. 2 and 3 and 1-10 under the given scenario and weighted LGD being the single net present value 10 year weighted LGD under the given scenario The M-RAM model can be calibrated with further developments of the ASA service.INTRODUCTION Whether lenders opt for the Standardised approach to credit risk or an Internal Ratings Based IRB approach. Accordingly M-RAM draws upon our unique historic downturn default data and upon our full Acadametrics Scenario Analysis ASA methodology. ASA takes a line by line mortgage data download from the lender system and provides loss assessments and weighted LGD at the level of each individual property. to provide a useful interactive desktop tool. For lenders not requiring the interaction afforded by the desktop model. BACKGROUND For lenders opting for an IRB approach. Product Development and Strategy teams for assessing the impact of proposed changes to the lending profile/policy and of possible mortgage book sale. developed from Land Registry data.

Acadametrics House Prices were developed to use property type data at county/London borough level from Land Registry data. sale or purchase. below. are available as outlined in CALIBRATION. However. Since our Acadametrics House Prices take data from the Land Registry. It is important to match an index to a particular purpose and Land Registry data. The required Loan Data Specification LDS download for ASA is described in Appendix 1. based as it is upon ASA output. For Northern Ireland and Scotland. the ideal tool for the regular provision of a current valuation. Clearly. MODEL FEATURES VALUATION Accurate revaluation of a portfolio is always necessary when a mortgage portfolio is subject to review.“downturn” scenario). Product Development and Strategic Planning Departments and others. they cover England and Wales. As the Acadametrics House Prices are the only monthly source of property valuation data using the full mix adjusted Land Registry transacted house prices to county/London borough and property type level they are. or under the Standardised or IRB approach. a set of benign economic conditions. are clearly appropriate for valuation purposes. Beta users have indicated that output using 2DD and only the representative pool UK data has. and is described in Appendix 1) The standard ASA output tables are generated using a representative pool of UK mortgage loan data. These data are loaded into ASA such that the resulting ASA output tables loaded into M-RAM are calibrated with the lender’s own data. M-RAM also has great potential as an investigatory tool for Marketing. as described above. Lenders also employ their own economic scenarios which can be substituted for one of the above as required. is a definitive tool for all lenders for ICAAP purposes. we use our own Acadametrics House Prices within ASA to provide an indexed revaluation. ASA is designed to be the definitive tool for scenario analysis and stress testing for risk management and regulatory purposes. Acadametrics will use data preferred by the client such as data from the Register of Scotland. a severe shock. be this for risk assessment. for a mortgage portfolio the use of an index or equivalent series is especially appropriate given the availability of a prior value upon which to base the calculation. and is illustrated on our website) or a 49 cell matrix of LTV by year of origination (this is termed the two data dimension. There are two “levels” of summary information which can be entered into M-RAM. a level of granularity unavailable from published house price indices. These are either: • • the total mortgage asset value and number of loans (this is termed the one data dimension. the output from 1DD can only be illustrative but it can be more than adequate for initial assessment purposes. Halifax or Nationwide. to supplement more costly surveyor or AVM valuations used only on a periodic basis. specifically for revaluation purposes. Yet further calibration options. to enhance accuracy. An even greater level of accuracy than that afforded by 2DD input and the use of representative pool UK data is available for lenders providing their own line by line mortgage data. as the only source of real house prices in England and Wales. provided results which are close to their expectations derived from their own. We are equally confident that M-RAM. nevertheless. 1DD. Prototype Mortgage Risk Assessment Model Prospectus April 2008 © Acadametrics Limited 2 . 2DD. extensive. In the absence of any bespoke revaluations using chartered surveyors. internal modelling. we believe. the long run UK average.

we also offer a Mortgage Risk Assessment Service M-RAS. house price and interest rate change assumptions) applicable to the four macroeconomic scenarios an example of the parameter input to the ASA model is attached at Appendix 2. Clients providing LDS input may take the desktop Mortgage Risk Assessment Model M-RAM for interactive use in-house. regional house prices and UK parameter assumptions. the loan data profile can be at either UK level using our representative pool of UK mortgage loan data or at Lender level using LDS. county house prices and regional parameter assumptions.g. This employs 2DD input which is run on M-RAM calibrated at UK/UK. Regional/UK and Regional/Lender calibrations are available to lenders subscribing to M-RAM for a minimum of three years and providing LDS level data. A pricing table is provided below and explained alongside the various options in Appendix 3. As far as the parameter assumptions are concerned.CALIBRATION Calibration of M-RAM depends upon the following three factors: • • • the loan data profile loaded into the ASA model the house prices. The results are provided as a printed report. The parameter assumptions comprise the various key macroeconomic factors (e. UK scenarios) Regional/UK (UK mortgage loan data. One of the two alternative outputs is supplied. Prototype Mortgage Risk Assessment Model Prospectus April 2008 © Acadametrics Limited 3 . WHICH SOLUTION? Dependent on the client needs. Additional Regional/UK or Regional/Lender calibrations can be run for specific subbooks. In return. UK scenarios) Regional/Lender (lender mortgage loan data. Since these can all be taken at either UK or regional level a number of alternative calibration options arise: • • • • UK/UK (UK mortgage loan data. loss hazard and loss parameter assumptions employed by ASA the scenario assumptions As stated above. The latter provides cost advantages if the results are required annually for a minimum of three years and a one year notice of any termination is agreeable. UK/Lender. regional house prices and UK parameter assumptions. regional house prices and hazard rates and lender’s own data) We consult in detail with clients to ensure that we develop the most appropriate regional solution. books for sale or purchase and for product development work etc. depending upon client preference. Ultimately. UK scenarios) UK/Lender (lender mortgage loan data. namely: • • loss estimates weighted LGD VAT is applicable to M-RAM but not to M-RAS subscriptions. SUBSCRIPTIONS We offer One-Off or Three Year Rolling subscription agreements. the choice of calibration will depend upon the likely use. we provide one year notice of any like for like subscription change. Regional/UK or Regional/Lender level. we employ Acadametrics House Prices to provide house price valuations and we take hazard rates and loss parameters from the Acadametrics unique historic possessions database.

K.a.o.o.o.a.o.o. M-RAM p.o.a. Prototype Mortgage Risk Assessment Model Prospectus April 2008 © Acadametrics Limited 4 .o.a.a. p.o. p.a.o. p. M-RAS p. Standard UK Regional Full Data Download from Lender p.a.a.o.o.a.a. n/a n/a M-RAM .a.o. Full Data Download from Lender p.o.requires the addition of VAT to the quoted price M-RAS . p.a. p.a.o. p. p. 1 Year Agreement M-RAM p.a.requires no VAT to be added to the quoted price Our standard 5% discount for lenders allowing us to use their 2DD or LDS data for academic/modelling purpose on an anonymised basis applies to the above prices. M-RAS p. p.3 Year Agreement Calibration level Pool Standard UK U.

APPENDIX 1 – TWO DATA DIMENSION 2DD AND LOAN DATA SPECIFICATION LDS 2DD DATA INPUT Total Loans Distribution Original LTV Band 0 <75% 75-85% 85-90% 90-95% 95-100% 100-120% 120% plus 0 0 0 0 0 0 0 Development Year 1 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 3 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 6 plus 0 0 0 0 0 0 0 Prototype Mortgage Risk Assessment Model Prospectus April 2008 © Acadametrics Limited 5 .

if necessary in combination. to derive Cumulative Net Advance and Purchase Price/Valuation where one or more of the correct fields are missing.g.valuation or testing is required for any subgrouping of results if required Use codes O C C** Output Calculation prior to Output This field is used. Government Office. Repayment or Other specify e. HBOS etc supporting code definitions required ie inclusive of all further advances/repayments to date at "F" exact date of Item E but year will suffice provide a note methods employed of the latest cumulative advance as recorded (should be E/G) cover amount applicable at date of extract from most recent advance to maturity flag (status at initial advance) original purchase price Minmum Requirement at the "Extract Date" the arrears balance at the extract is preferred but months will suffice if not available under the terms of the loan if lender valuation is being provided if Acadmetrics' current valuation is required for use if precise regional analysis.LOAN DATA SPECIFICATION Extract Date: Reference A B C D E F G H I J K L M N O P Q R S T U V W ACCOUNT NUMBER REPAYMENT TYPE REGION CODE PRODUCT CODE LATEST NET CUMULATIVE ADVANCE DATE OF LATEST ADVANCE VALUATION AT LATEST ADVANCE MATURITY DATE LTV AT DATE OF LATEST ADVANCE INDEMNITY COVER TERM FROM LATEST ADVANCE FIRST TIME BUYER INITIAL PURCHASE PRICE INITIAL ADVANCE INITIAL VALUATION CURRENT OUTSTANDING BALANCE MONTHS IN ARREARS ARREARS BALANCE NEXT EXPECTED PAYMENT CURRENT PROPERTY VALUATION PROPERTY TYPE FULL POSTCODE CATEGORY CODE Use Codes O O O O C O V C C** O V O V V V O V O O O O V O Notes or unique identifier probably Interest only. Validation or Reasonableness tests V Prototype Mortgage Risk Assessment Model Prospectus April 2008 © Acadametrics Limited 6 .

00% 5 5.SEVERE CYCLE Year of Projection Mortgage Interest Rate Average Arreardom at Possession Average Arreardom Possession to Sale Indexation Factor Depreciation Factor Variable Selling Cost Cost inflation Factor Fixed Selling Cost PV Interest Rate 0 1 5.00% 6787.00% 6526.03 17.00% 3.50% 4.50 5.50% 4.00% 5578.50% 3.00% 7 5.30% 5181.05 22.50% 5259.70% 13 12 1.00% 3.00% 3.00% 10 5.00% 3.22 4.00% 5364.03 20.00% 3.9 22.70% 13 12 1.70% 13 12 1.00 4.00% 13 12 0.00% 8 5.85 22.50% 4.50% 4.00% 5000 Prototype Mortgage Risk Assessment Model Prospectus April 2008 © Acadametrics Limited 7 .59 4.68 4.70% 13 12 1.95 27.00% 4 7.00% 9 5.025 17.00% 3 8.50% 2.14 4.00% 5802.00% 13 12 0.30% 5115.00% 6034.00% 3.00% 6 5.50% 3.22 6.50% 4.00% 3.61 4.70% 13 12 1.07 20.98 4.50% 1.70% 12 10 1.50% 1.00% 3.70% 13 12 1.50% 2.50% 4.00% 13 12 0.03 20.APPENDIX 2 – EXAMPLE OF A SCENARIO PARAMETER ASSUMPTION SET FOR ASA PARAMETER ASSUMPTIONS .00% 6275.1 25.40 7.00% 2 7.

p. 2.o.o. THREE YEAR ROLLING AGREEMENT INCLUDES A SINGLE FULL MODEL RECALIBRATION PER ANNUM SUBSCRIPTION COST OUTPUT UK calibration uses the FTHPI Valuation Regional series.a.a.a.a.o.a. p.o. regional hazard rates and regional parameter assumptions (from Acadametrics historic data) Pool Standard UK UK Lender Loan Data Specification Standard UK Regional Lender Loan Data Specification p.000 loans loss estimate weighted LGD shadow IRB Standardised capital Provides a standardised risk weighted capital calculation interactive DESKTOP BASEL RISK ASSESSMENT MODEL (PLUS VAT) Calibration Loan Data Specification output uses the line by line mortgage data from the lenders own system (a summary of output is included in the desktop model). UK hazard rates from Acadametrics unique historic database.o. Prototype Mortgage Risk Assessment Model Prospectus April 2008 © Acadametrics Limited 8 . 3 and 1-10 under the given scenarios Provides a single net present value 10 year weighted LGD under the given scenarios Provides a "shadow" IRB capital calculation A Standard output uses the UK data pool of 200. p.APPENDIX 3 – EXPLANATION OF THE SUBCRIPTION OPTIONS We describe below the options available under a Three Year Rolling agreement.o.o. p. Shows the net present value of losses as a result of possession (Probability of Loss * Loss Given Default) for years 1.a. Loan Data Specification Additional Calibrations p.a. Regional calibration uses an agreed set of sub regional house price valuation series.o. book sale or purchase.o. BASEL RISK ASSESSMENT SERVICE (NO VAT) Further additional calibrations: possibly for specific sub-books. product development etc Standard UK UK Loan Data Specification Standard UK Regional Loan Data Specification p. and parameter assumptions (also drawing on Acadametrics historic data) to generate the look up tables upon which the 1DD and 2DD numbers draw to create the output in the model. p. p.a.a. Loan Data Specification Additional Calibrations p.a.o.

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