LDR Score - Loan Default Risk Score

Much has been written about what caused the Foreclosure Crisis, but it cannot be denied that a large part of the Crisis was the result of people buying homes that they could not afford.   Even worse, for Investors, there was no adequate manner to determine the quality of the loans.

Loans were provided to homeowners primarily based upon Credit Scores.  However, as even Fannie Mae admits, Credit Scores were not meant to evaluate Default Risk on individual mortgage loans.  Today, Fannie Mae still uses Credit Scores, Equity and Debt Ratios to approve loans, but each category is “rated” individually, and not in an integrated manner. 

For the future, under new proposed regulations, the “Qualified Residential Mortgage” will use Equity, Debt Ratios, and the previous 24 month history of late payments to approve loans.  If anything, the guidelines remain essentially the same. 

The LDR Score is a comprehensive methodology of evaluating the Default Risk of individual loans.  The score was developed after examining thousands of both performing loans and defaulted loans, and thousands of modifications.  The results of the exams “identified” common characteristics of “troubled” or “defaulted loans” that did not exist in “strong” performing loans. 

Further examination of the loans found that these same characteristics could be found in the loan when originated.  However, underwriting processes were not sufficient to identify these characteristics, or to properly evaluate the risk. 

The key element of the LDR Score is the “Y Variable”.  The “Y Variable” is a complex algorithm that uses the “identified characteristics” of defaulting loans.  The characteristics are “integrated together” to form a baseline default score, and then other “contributing or compensating” factors are integrated into the Y Variable.  The end result is the LDR Score.

Major Benefits of the LDR Score include:

Quantitative Measurement Of Default Risk. 

Fraud Detection.

Easily incorporated into underwriting analysis for better approvals.

Offers improved Portfolio Risk Management.

Provides loan Purchasers a method to determine if a loan fits their needs.

Offers Rating Agencies a measure for evaluating MBS.

Lessens Risk of Foreclosures