Modeling the current loan-to-value structure of mortgage pools without loan-specific data

Peter Palmroos

Journal of Credit Risk

Abstract: ABSTRACT This paper presents a method for approximating the current loan-to-value (CLTV) and;remaining principal structures of heterogeneous mortgage loan pools. The method;uses widely available public aggregate loan data instead of loan-specific data, the;availability of which is highly restricted outside lenders. The model is based on a;simple matrix equation for the pool's inflows and outflows as well as on a division of;the pool into multiple homogeneous cohorts. The estimated structure is compared with;the true structure, as reported by Finnish banks. This comparison indicates the method;is accurate. The resulting CLTV and remaining principal structures help to improve;the accuracy of mortgage loan credit risk models and enable a reliable approximation;of the pools' expected loss given defaults (ELGDs).

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