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Vision 2014: Sophisticated-loss-forecasting-made-easy
Vision 2014: Sophisticated-loss-forecasting-made-easy
Vision 2014: Sophisticated-loss-forecasting-made-easy
Vision 2014: Sophisticated-loss-forecasting-made-easy
Vision 2014: Sophisticated-loss-forecasting-made-easy
Vision 2014: Sophisticated-loss-forecasting-made-easy
Vision 2014: Sophisticated-loss-forecasting-made-easy
Vision 2014: Sophisticated-loss-forecasting-made-easy
Vision 2014: Sophisticated-loss-forecasting-made-easy
Vision 2014: Sophisticated-loss-forecasting-made-easy
Vision 2014: Sophisticated-loss-forecasting-made-easy
Vision 2014: Sophisticated-loss-forecasting-made-easy
Vision 2014: Sophisticated-loss-forecasting-made-easy
Vision 2014: Sophisticated-loss-forecasting-made-easy
Vision 2014: Sophisticated-loss-forecasting-made-easy
Vision 2014: Sophisticated-loss-forecasting-made-easy
Vision 2014: Sophisticated-loss-forecasting-made-easy
Vision 2014: Sophisticated-loss-forecasting-made-easy
Vision 2014: Sophisticated-loss-forecasting-made-easy
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Vision 2014: Sophisticated-loss-forecasting-made-easy

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  • 1. ©2014 Experian Information Solutions, Inc. All rights reserved. Experian and the marks used herein are service marks or registered trademarks of Experian Information Solutions, Inc. Other product and company names mentioned herein are the trademarks of their respective owners. No part of this copyrighted work may be reproduced, modified, or distributed in any form or manner without the prior written permission of Experian. Experian Public. Sophisticated loss forecasting made easy Chuck Robida Experian Robert Stone Experian #vision2014
  • 2. 2©2014 Experian Information Solutions, Inc. All rights reserved. Experian Public. Making it easy for lenders to fulfill escalating regulatory requirements – Steve Jobs This is what customers pay us for – to sweat all these details so it's easy and pleasant for them to use our computers. We're supposed to be really good at this. That doesn't mean we don't listen to customers, but it's hard for them to tell you what they want when they've never seen anything remotely like it.
  • 3. 3©2014 Experian Information Solutions, Inc. All rights reserved. Experian Public. Experian core competencies Enable lenders to focus efforts on revenue and profitability growth Analytical expertise Execution capability Domain knowledge
  • 4. 4©2014 Experian Information Solutions, Inc. All rights reserved. Experian Public. Regulations solution consulting
  • 5. 5©2014 Experian Information Solutions, Inc. All rights reserved. Experian Public. Regulatory  Comprehensive Capital Analysis and Review  Dodd Frank Act Stress Test  Basel Sound businesses practices Everyone is invited to the future
  • 6. 6©2014 Experian Information Solutions, Inc. All rights reserved. Experian Public. Solution – the easy part Experian executes loss forecasting algorithm Mortgage suite  First  Second  HELOC Auto suite Bankcard suite Reports with quarterly expected losses Lender sends consumer and account data
  • 7. 7©2014 Experian Information Solutions, Inc. All rights reserved. Experian Public. Stress scenario: severely adverse First mortgage Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Incremental loss total $50.1 $71.2 $89.0 $106.8 $117.5 $111.6 $106.0 $95.4 $86.8 Cumulative loss total $50.1 $121.3 $210.3 $317.1 $434.5 $546.1 $652.1 $747.5 $834.3 Incremental default rate 0.53% 0.68% 0.79% 0.94% 1.03% 1.01% 1.01% 0.97% 0.95% Cumulative default rate 0.53% 1.21% 2.00% 2.93% 3.96% 4.97% 5.98% 6.95% 7.89% Cumulative prepay rate 2.64% 5.14% 7.63% 10.13% 12.49% 14.54% 16.38% 18.10% 19.73% Stress scenario: base line First mortgage Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Incremental loss total $49.8 $50.7 $51.2 $51.1 $50.4 $49.2 $47.5 $45.3 $42.7 Cumulative loss total $49.8 $100.5 $151.7 $202.8 $253.2 $302.5 $350.0 $395.3 $438.0 Incremental default rate 0.50% 0.49% 0.49% 0.49% 0.49% 0.50% 0.50% 0.51% 0.53% Cumulative default rate 0.50% 0.99% 1.48% 1.97% 2.46% 2.96% 3.46% 3.98% 4.51% Cumulative prepay rate 1.49% 2.87% 4.20% 5.51% 6.71% 7.70% 8.62% 9.50% 10.35% Deliverables Meet regulatory and sound business requirements
  • 8. 8©2014 Experian Information Solutions, Inc. All rights reserved. Experian Public. Client  Personally identifying information  Property address*  Loan type/terms  Interest rate/type  Open date  Original, current balance  Current status  Original property value  Current property value  Economic forecasts–MSA/state/US  HPI forecasts–MSA/state Experian  Current VantageScore® V3.0  AVM*  Economic forecasts –MSA/state/US  HPI forecasts – ZIP®/MSA/state Data requirements Calculations  Static ► Origination LTV ► Spread at origination  Forecasted ► Current LTV, equity measures ► Current interest rate spread ► Transformations (economic)
  • 9. 9©2014 Experian Information Solutions, Inc. All rights reserved. Experian Public. Bottom-up The piecing together of systems to give rise to more complex systems1  Competing-risk framework  Unique approach Analytical approaches 1 "Top-down Approach." Wikipedia. Wikimedia Foundation, 02 Oct. 2014. Web. 11 Mar. 2014. Top-down The breaking down of a system to gain insight into its compositional sub-systems1  Vintage-based  Roll rates EADEL PD LGD
  • 10. 10©2014 Experian Information Solutions, Inc. All rights reserved. Experian Public. Competing risk frame-work Obs/Out 0 PPD 1 PPD 2 PPD 3–5 PPD Default Paid 0 PPD 0.950 0.008 0.009 0.011 0.007 0.015 1 PPD 0.300 0.300 0.160 0.180 0.010 0.005 2 PPD 0.098 0.200 0.300 0.250 0.150 0.002 3–5 PPD 0.004 0.100 0.150 0.325 0.375 0.001 Loan Forecast 1 State 1 Forecast 2 State 1 State 2 State 3 State 4 State 5 State 6 State 2 Forecast 2 State 3 Forecast 2 State 4 Forecast 2 State 5 State 6
  • 11. 11©2014 Experian Information Solutions, Inc. All rights reserved. Experian Public.  Cutting edge methodology ► Discrete = interactions: consumer x loan x property x geography x economy ► Current consumer risk  Flexible  Accessible  Cost effective  Transparent The Experian difference
  • 12. 12©2014 Experian Information Solutions, Inc. All rights reserved. Experian Public. Approach to meet bank and regulatory requirements:  Data pull and aggregation  Pooling of accounts and aggregation to general pool-level predictions  Stress test following FR Y-14M data schedules  Strictly impose sound modeling practices  Time series analytics  Model diagnostics  Consistency of results  Focus on economic factors Stress testing
  • 13. 13©2014 Experian Information Solutions, Inc. All rights reserved. Experian Public. Stress testing Assess or predict stress values for economic variables related to credit risk Calculate minimum capital requirements and other desired outputs under scenario Specify basic stress-test scenario characteristics Predict values from credit loss models consistent with stress-scenario assumptions Methodology
  • 14. 14©2014 Experian Information Solutions, Inc. All rights reserved. Experian Public. Discussion items:  Number of and types of models (e.g., risk, financial, etc.)  Framework components to be analyzed and delivered  Availability of model data, code and documentation  Specifications of delivered reports Stress testing
  • 15. 15©2014 Experian Information Solutions, Inc. All rights reserved. Experian Public. Input required:  Data ► Scores and components, key segments, exclusions indicators, observation dates and performance flags ► Benchmark scores to eliminate need for archives ► Macroeconomic data for stress testing and agreed upon thresholds ► Data dictionaries and data processing requirements  Full model documentation  Model scoring coding – eliminate recoding Stress testing
  • 16. 16©2014 Experian Information Solutions, Inc. All rights reserved. Experian Public. Experian = experience, collaboration and partnership Extensive experience:  Notable CCAR/DFAST experience including work with many of the Top-5 U.S. banks  Extensive experience in loss forecasting, stress testing, modeling and analytics, banking and risk measurement and simulation  Unmatched modeling and benchmarking experience  Extensive understanding of credit and business data resulting in best practice methodology to develop the most predictive loss forecasting systems Experian solution Stress testing
  • 17. 17©2014 Experian Information Solutions, Inc. All rights reserved. Experian Public. Experian = experience, collaboration and partnership Collaborative approach and partnership:  Experian can provide support on the whole process or specific project segments  Provide detailed documentation of Experian’s stress testing and benchmarking process  Knowledge transfer of the process and models to the bank as part of the project process Experian solution Stress testing
  • 18. 18©2014 Experian Information Solutions, Inc. All rights reserved. Experian Public. For additional information, please contact: Chuck.Robida@experian.com Robert.Stone@experian.com Hear the latest from Vision 2014 in the Daily Roundup: www.experian.com/vision/blog @ExperianVision | #vision2014 Follow us on Twitter
  • 19. 19©2014 Experian Information Solutions, Inc. All rights reserved. Experian Public. Visit the Experian Expert Bar to learn more about the topics and products covered in this presentation.

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