Evaluating Nontraditional Mortgages

Nontraditional mortgage products, including Option ARMs and Interest Only loans, have changed the financial landscape.

It is important to conduct a stress test to determine safety and soundness of their of nontraditional mortgage products. To help institutions perform this analysis, we can:

• Benchmark an institution’s existing model to industry standards and practices
• Conduct an independent 3rd party stress test based on OFHEO (or modified OFHEO) standards
• Assist in the design and implementation of a stress specifically geared to an institution’s existing book

Third party reviews can help to assure management and regulators alike that the stress tests are objective and meet the highest professional standards.

Our stress tests have been specifically designed for nontraditional mortgages and assess the adequacy of an institution’s capital under highly unfavorable economic conditions, including rapidly rising interest rates, declining house prices, negative amortization, and payment shock.

The stress tests enable an institution to estimate the amount of “economic” capital that would be required to support the mortgages over time, accounting for both loan-level and pool level credit enhancements. They also project cumulative defaults and the gross and net losses that would result in an adverse environment.

For more information about our Credit Risk Analysis Services, please contact us.

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