System and method for portfolio valuation using an age adjusted delinquency rate

• US 20040030629A1
• Filed: 06/17/2003
• Published: 02/12/2004
• Est. Priority Date: 06/17/2002
• Status: Abandoned Application

• Current Assignee: JP Morgan Chase Bank, N.A. (JP Morgan Chase & Co)
• Original Assignee: JP Morgan Chase Bank, N.A. (JP Morgan Chase & Co)
• Inventors: Freeman, Charles, Xue, Xingxiong
• Application Number:
  US10/462,773
• Publication Number:
  US 20040030629A1
• Time in Patent Office: Days
• US Class Current: 705/36
• CPC Class Codes: G06Q 40/02 Banking, e.g. interest calculation or account maintenance credit or loans G06Q40/03
• CPC Class Codes: G06Q 40/03 Credit; Loans; Processing thereof
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis

Abstract

A system and method for determining performance characteristics of loan portfolios. The system and method employs a delinquency rate analysis to perform a valuation of a portfolio using a new statistic obtained by integrating the age effects with the delinquency rates. A fictitious vintage of loans known as a proxy vintage is created from historical industry data and the calculated average delinquency rate is assigned at all the ages. A portfolio'"'"'s credit performance is then evaluated by combining the distribution of the variance of age with the historical vintage information. An equivalent base delinquency rate of a vintage is generated as a derived delinquency rate the portfolio would have had at a base age. Finally, an age adjusted delinquency rate is determined which is a weighted average of the equivalent base rates of all the vintages in a portfolio.

Claims

1. A method for evaluating the credit performance of a portfolio of loans comprising:

a) obtaining a proxy vintage database containing data from a large pool of loans, the proxy vintage database being organized into proxy vintages according to the ages of the loans, each of the proxy vintages having an average delinquency rate of the loans contained therein, one of the proxy vintages being denoted as a base proxy vintage;

b) determining an age adjustment factor for each of the proxy vintages by dividing the average delinquency rate of the base proxy vintage by the average delinquency rate of the proxy vintage;

c) creating portfolio vintages from the loans in the portfolio loans according to their ages;

d) determining delinquency rates of each of the portfolio vintages;

e) determining an equivalent base rate for each of the portfolio vintages by multiplying the delinquency rate of a portfolio vintage by the age adjustment factor of a proxy vintage having a comparable age; and

f) combining equivalent base rates for the portfolio groups into a single age adjusted delinquency rate.

2. The method according to claim 1, wherein the proxy vintage database contains delinquency data selected from the group consisting of 30 Days Past Due, 60 Days past Due, 90+ Days Past Due and In Foreclosure.

3. The method according to claim 1, wherein a granularity of the ages of the proxy vintages is quarterly.

4. The method according to claim 1, wherein the ages of the proxy vintages and the ages of the portfolio vintages are measured relative to an origination date of a loan.

5. The method according to claim 1, wherein the combining step further comprises weighting the portfolio vintages during the combining step.

6. The method according to claim 5, wherein the weighting step further comprises assigning a respective weight to each of the portfolio vintages and wherein the combining step further comprises adding the products of the respective weights and the delinquency rates of their corresponding portfolio vintages.

7. The method according to claim 6, wherein the weights are determined according to the number of loans in a portfolio vintage relative to the total number of loans in the portfolio.

8. The method according to claim 1, wherein the base age is determined according to a length of time required to sell collateral securing the loan.

9. The method according to claim 8, wherein the base age is two years.

10. The method according to claim 1, wherein the loans are closed end loans.

11. The method according to claim 10, wherein the loans are mortgages.

12. The method according to claim 1, further comprising:

separating the portfolio and the proxy vintage database into sub-portfolios;

designating one of the sub-portfolios of the proxy vintage database as a base sub-portfolio;

performing steps b) through f) for each of the sub-portfolios of the proxy vintage database and the portfolio;

for each of the sub-portfolios in the proxy vintage database, determining a C-ratio, the C-ratio being a ratio of the age adjusted delinquency rate of the base sub-portfolio and the sub-portfolio at the base age.

for each of the sub-portfolios in the portfolios, determining an equivalent base age adjusted delinquency rate by multiplying the age adjusted delinquency rate for that sub-portfolio by the C-ratio for the corresponding proxy vintage database sub-portfolio; and

combining the equivalent base age adjusted delinquency rates to generate a single characteristic adjusted delinquency rate for the portfolio.

13. The method according to claim 12, wherein the combining step further comprises weighting the equivalent base age adjusted delinquency rates during the combining step.

14. The method according to claim 13, wherein the weighting step further comprises assigning a respective weight to each of the equivalent base age adjusted delinquency rates and wherein the combining step further comprises adding the products of the respective weights and the equivalent base age adjusted delinquency rates of their corresponding sub-portfolios.

15. The method according to claim 14, wherein the weights are determined according to the number of loans in a portfolio group relative to the total number of loans in the portfolio.

16. The method according to claim 12, wherein the separating step further comprises separating the portfolio and the proxy vintage database into sub-portfolios according to a characteristic of the portfolio and the proxy vintage.

17. The method according to claim 16, wherein the characteristic is a type of mortgage.

18. The method according to claim 17, wherein the type of mortgages is selected from the group consisting of Government Adjustable Rate Mortgages, Government Fixed Rate Mortgages, Conventional Conforming Adjustable Rate Mortgages, Conventional Conforming Fixed Rate Mortgages, Conventional Non-Conforming Adjustable Rate Mortgages, and Conventional Non-Conforming Fixed Rate Mortgages.

19. The method according to claim 1, further comprising, using the age adjusted delinquency rate in taking an action with respect to the portfolio.

20. The method according to claim 19, wherein the action with respect to the portfolio is purchasing the portfolio.

21. The method according to claim 19, wherein the action with respect to the portfolio is selling the portfolio.

22. A method of predicting the future credit performance of a portfolio comprising:

a) obtaining a proxy vintage containing delinquency rates for a large pool of loans;

b) determining a most recent age at least one vintage of the portfolio, the age being denoted a vintage age;

c) determining a change between a delinquency rate of the proxy vintage at an age corresponding to the vintage age and a delinquency rate at an immediately preceding age;

d) generating a predicted delinquency rate by adding the change to a delinquency rate of the portfolio at the most recent age; and

e) repeating steps c) and d) for successive ages of the proxy vintage, thereby generating a time series of predicted delinquency rates for the portfolio.

23. The method according to claim 22, wherein the proxy vintage contains delinquency data selected from the group consisting of 30 Days Past Due, 60 Days past Due, 90+ Days Past Due and In Foreclosure.

24. The method according to claim 22, wherein a granularity of the ages of the proxy vintage and the portfolio is quarterly.

25. The method according to claim 22, wherein the ages of the proxy vintage and the ages of the portfolio are measured relative to an origination date of a loan.

26. The method according to claim 22, wherein the loans are closed end loans.

27. The method according to claim 22, wherein the loans are mortgages.

28. A method of predicting the future credit performance of a portfolio comprising:

a) obtaining a proxy vintage containing delinquency rate data for a large pool of loans;

b) for at least two ages of at least one vintage of the portfolio, determine a ratio between the delinquency rate at an age of the portfolio to a delinquency rate of the proxy vintage at a corresponding age, the ratios being denoted performance ratios;

c) assigning respective weights to at the performance ratios;

d) generating a prediction ratio by summing the products of the at least two performance ratios by their respective weights; and

e) generating predicted delinquency rates for the at least one vintage of the portfolio by multiplying the prediction ratio by successive delinquency rates of the proxy vintage.

29. The method according to claim 28, further comprising determining a performance ratio for each of the ages of the portfolio.

30. The method according to claim 28, wherein the weights are determined by empirical data.

31. The method according to claim 28, wherein the most current age of the portfolio is given the largest weight.

32. A system for evaluating the credit performance of a portfolio of loans comprising:

a proxy vintage database containing data from a large pool of loans, the proxy vintage database being organized into proxy vintages according to the ages of the loans, each of the proxy vintages having an average delinquency rate of the loans contained therein, one of the proxy vintages being denoted as a base proxy vintage;

a dynamic underwriting processing system, the dynamic underwriting processing system performing the following processing;

a) determining an age adjustment factor for each of the proxy vintages by dividing the average delinquency rate of the base proxy vintage by the average delinquency rate of the proxy vintage;

b) creating portfolio vintages from the loans in the portfolio loans according to their ages;

c) determining delinquency rates of each of the portfolio vintages;

d) determining an equivalent base rate for each of the portfolio vintages by multiplying the delinquency rate of a portfolio vintage by the age adjustment factor of a proxy vintage having a comparable age; and

e) combining equivalent base rates for the portfolio groups into a single age adjusted delinquency rate.

33. The system according to claim 32, wherein the proxy vintage database contains delinquency data selected from the group consisting of 30 Days Past Due, 60 Days past Due, 90+ Days Past Due and In Foreclosure.

34. The system according to claim 32, wherein the ages of the proxy vintages and the ages of the portfolio vintages are measured relative to an origination date of a loan.

35. The method according to claim 32, further comprising:

a decision engine, the decision engine making decisions with respect to the portfolio; and

a feedback loop from the dynamic underwriting system to the decision engine, wherein the age adjusted delinquency rate is fed back to the decision engine to assist in taking an action with respect to the portfolio.