Summary
Value Creation Institute recently announced that its patented system for asset valuation, ValueScout, was found to be 98 percent accurate in prediction of loan default when tested with actual data. The test was conducted using loan servicing data with a previously known outcome. Anyone considering or actively buying or selling mortgage backed securities (MBS) needs to be aware of this product, which can accurately quantify risk and/or determine value
Analysis
Impact of ValueScout™ Algorithm:
It was proven with the sub-prime default meltdown and subsequent general financial debacle over the last 3 years that contemporary financial risk management analysis was inadequate to predict the catastrophic credit failure with residential borrowers. Traditional methods did not have the sophistication to analyze and determine key considerations for loan decision management. For instance, FICO scoring did not predict a borrower’s behavior with credit but instead gave a risk score to their historical payback on debt. AVM trending of property values to determine portfolio asset value was missing the analysis of the credit behavior of the home occupants. These models relied on historical trends and did not analyze the drivers and behaviors creating the trends originally. Behaviors drive actions and actions become history. If one could predict the behaviors the actions are just a scenario of the behaviors.
ValueScout™ changes the risk management paradigm since it avoids the traps of historical modeling. Instead, ValueScout™ statistically models consumer behaviors and predicts what actions a consumer will do with credit. ValueScout™ was created with scientific risk analysis tools from medical devices and aerospace fields, where unpredicted mistakes are intolerable due to potential loss of human life, ValueScout™ predicts with excellent accuracy the behavioral outcomes with loans before it happens using its probability financial calculations and linking it with Monte Carlo simulation and Economic Game Theory. These tools provide a financial institution the ability to simulate potential consumer scenarios. With this knowledge a new world of risk management is opened to the finance industry to be used in some of the following areas: loan servicing efficiency, loan modification filtering, risk management auditing, underwriting, capital markets loan pool valuation, and hedge funds. The resulting benefits are groundbreaking with new opportunities to reduce process cost, reduce payment default, identify a true loan modification with a lean process, and capital valuations based on predicted performance.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
