Articles Investors Obtain Mortgage Delinquency Insight with AFTs Integrated Default ModelMortgageMag Weekly - February 2007Changing Real Estate Market Prompts House Price Index (HPI) Data Integration for More Accurate, Intelligent Hedging Applied Financial Technology (AFT) announced today that it now provides leading lenders and mortgage financing professionals with its highly accurate mortgage loan default model, deploying House Price Appreciation Index (HPI) data. With a changing real estate market and house prices widely expected to stabilize and even to decline in many Metropolitan Statistical Areas (MSAs), gauging potential effects on defaults of mortgage loans has become far more critical than in the prior ten years. The high HPI of the past had masked many potential credit issues. Today, however, decelerating house prices are highlighting the need for a more granular and realistic default model to analyze mortgage portfolio performance and avoid positions where excess return does not compensate for default risk. "With the changing real estate environment, HPI is of tremendous importance when modeling projected delinquencies, defaults and losses of loans," said Michael Bykhovsky, CEO and President of Applied Financial Technology. "Integrating data about the loan, the borrower, the historical and projected HPI at the MSA level, and the analysis generated by the advanced AFT prepayment models, now allows us to dramatically improve the accuracy of projections regarding the probability of delinquencies and defaults." Added Mr. Bykhovsky, "As our clients are realizing, a single HPI projection for an entire portfolio is not enough. HPI, after all, varies by MSA, and it is the MSAs with low to negative HPI that contribute disproportionately to losses. We have integrated this feature into the model." AFT's newly integrated default model simulates HPI distribution per various MSAs along time horizons to provide lenders and MBS traders with a projection of delinquent behavior along transitional periods. These are current to 30 days, 30 to 60 days, 60 to 90 days, 90 days to default, and default to liquidation. For liquidation, a separate model calculates severity based on liquidity and losses. Also, because mortgage delinquency status influences a loans propensity to prepay, AFT has integrated its prepayment model with its default model. Now, the probability of individual loan prepayments in AFTs model is affected by that loans delinquency status; and the loans probability of delinquency or going into default is a function of its exposure to prepayment incentives -- providing mortgage financing professionals with pinpointed insight into a loans performance. About Applied Financial TechnologyApplied Financial Technology (AFT) provides sophisticated mortgage-loan default modeling; non-Agency CMO loan-level databases; and prepayment analytics to the nations largest broker/dealers, lenders, insurance companies, institutional investors, and hedge funds. Among its clients are five of the nations largest U.S. banks. Since 1996, AFT has delivered quality risk analytics to the mortgage industry through its highly regarded quantitative methods. It offers mortgage-loan default and prepayment models for fixed, adjustable, prime and sub-prime mortgages and home equity lines as well as asset-backed securities. The company also provides option-adjusted valuation and risk management tools for mortgage- and asset-backed securities, collateralized mortgage obligations, and an interest rate processes. The AFT library is integrated with all major analytics providers, including Bloomberg L.P. Gerry Wisz Liz Hall, Applied Financial Technology, lizhall@aftgo.com
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