How to Use Static Pools to Determine Projected Portfolio Loan Losses

by Victoria Duff

A static pool is a pool of loans acquired or originated during a specific time period and can be vintage or current. These pools are tracked by the lending institutions with regard to defaults, refinances and repayments over the term. Pools of loans that have already matured are called vintage static pools. The data acquired from both vintage and current static pools of loans is useful in predicting the experience of pools of new loans. Static pool analysis compares similar vintage and other current loan pools with current pools or, for funding purposes, expected performance of new loans to be made with the proceeds of new funding.

Identify similar pools of loans to be used for comparison. Similar pools would have similar credit risk, collateral type and age, contract term and loan-to-value ratios. If a pool of loans is being considered for purchase, consider any differences in loan underwriting policies of the original lender.

Research the economic environment when the loans were issued, if using a vintage static pool as a benchmark. If evaluating the performance of a loan pool to be purchased, or the potential performance of current loans, against a static pool benchmark many factors can influence performance so the accuracy of your analysis is determined by selecting for details that make the two pools similar in more ways than just asset quality and type.

Compare the static pool with the current or projected loan pool according to the constant prepayment rate (CPR), which measures how many loans are prepaid prior to maturity; default proportion, which measures the percentage of defaulted loans; and loss severity, which is the difference in the amount of money that would have been collected from all the loans had there been no prepayments or defaults.

Include cash outflows to further identify similarities in loan pools. Cash outflows include the total amount of each loan and the total of loans for the entire pool, origination fees to third parties, insurance premiums paid as part of the loan, servicing fees, expenses in connection with repossession, reconditioning and remarketing of repossessed assets and other costs of administering the loan program.

Include cash inflows associated with each pool. Cash inflows include interest and principal from regularly scheduled loan payments, prepayments of principal as a result of refinancing or trade-in if comparing auto loan pools, proceeds of repossession sales, insurance recoveries and any rebates or other special situation cash inflows.

Tip

  • The performance of vintage pools during specific economic conditions such as recessions, periods of credit crisis, regional corporate layoffs and the aftermath of natural disasters, such as hurricanes and earthquakes, may give a more accurate picture of loan performance than current loan pools not affected by a change in the local economy.

Warning

  • Cash outflows and cash inflows are particularly important if you are using vintage pools to try to evaluate potential loan pool experience under special economic circumstances. Costs and returns can change depending on the year of origination and location of the loan pools. If you are trying to predict performance of your auto loan pool after your area has undergone a devastating hurricane, and you are comparing vintage static pools from other areas hit by hurricanes, adjust for changes and differences between the cash flow details for each region.

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I have 14 years of experience working with alcoholics and would like to write about this subject. I have included some of my articles on business and Internet marketing, but I am also capable of writing and editing other subjects.

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