The latest white paper from the VantageScore Solutions analytics team provides a remedy for credit-score confusion that troubled investors and issuers of asset-backed securities in the days leading up to and following the recent recession.
The paper, The Role of Credit Scores in Consumer Loan Securitization, explains how misinterpretation of credit scores, and the way they represent repayment risk, may have fed that confusion. It further details how a clear understanding of the relationship between scores and probability of default (PD) can enhance investors’ risk evaluations, and give issuers the flexibility to choose whichever credit scoring model is best for their business.
Many investors in mortgage-backed securities (MBS) were stung during the recession as default rates increased, even with portfolios of loans to consumers with high credit scores. These investors, and many issuers misread their portfolio risk, due to misunderstanding of the dynamic relationship between PD values and credit scores. The white paper explains that relationship in terms that are relevant to securities issuers and investors.
The white paper includes:
- A description of the securitization process
- A credit scoring primer
- Demonstration of how shifts in consumer credit risk can lie hidden behind credit scores
- Strategies for analyzing and preparing for shifts in consumer credit risk
Accompanying the white paper is a webcast that explains the lifecycle of credit scores in the securitization process and comments about the secondary market for consumer loans by Gregg Silver, chief financial officer at 1st Financial Bank USA and former treasurer of the Structured Finance Industry Group (SFIG). The webcast is currently available on VantageScore Solutions’ website.