Impact of Local Economic Vitality on Residential Loan Portfolio Performance

Posted on Posted in Portfolio Analytics

Homebuyers are routinely offered “location, location, location” as the most important thing to consider when purchasing a home. Recent analysis by WAIN Street shows that mortgage investors could also benefit by focusing on property locations.

An analysis of a portfolio of residential loans held by an institutional investor demonstrated that incorporating WAIN Street’s Local Economic Vitality into a credit risk assessment framework improved default prediction by over 10%. In the case of this investor, the new information identified an additional 120 defaults in a portfolio of 20,000 loans.

Why does this work? Local Economic Vitality is a monthly subnational ranking derived from macroeconomic factors such as labor market conditions, industrial production, sales, housing market conditions, and financial conditions. From a consumer credit risk perspective, it reflects a borrower’s future income prospects. Much as residential mortgage credit risk assessment typically incorporates a view on the trajectory of home prices to gauge future borrower equity, local economic vitality supplements knowledge about borrower income stability.

The complete report is available here: Impact of Local Economic Vitality on Residential Loan Portfolio Performance.