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Commercial Real Estate Model, 15 Oct 2013


At this summer's Credit Scoring and Credit Control XIII conference in Edinburgh, we presented new research into creating origination scores in an Age-Period-Cohort framework and methods for creating mean-reverting scenarios for lifetime forecasting.

Our presentation on "Incorporating lifecycle and environment into loan-level forecasts and stress tests" described how to combine the concepts of Age-Period-Cohort models with originations and behavior scores. Demonstrated with actual client data, we show that this is a small conceptual step the offers dramatic improvements in predicting probabilities out-of-time. The presentation is available here. If you would like a copy of the full academic article, please email us.

FASB's CECL proposal on changing the calculation of loss reserves has highlighted the need for lifetime loss forecasting. While the paper mentioned above is an ideal approach to computing lifetime losses, an important question remains as to what macroeconomic scenario should be used. Our research paper on "A mean-reverting model to create macroeconomic scenarios for credit risk models" was written to address that question.

Using an Ornstein-Uhlenbeck approach, we demonstrate how current conditions or a six to twelve month scenario from an economist may be relaxed onto long-run averages. In the near-term, this allows for point-in-time forecasts relevant to current conditions. In the long-run, this converges to the through-the-cycle average. Although ideally suited to the CECL proposal, this approach is a natural solution to lifetime loss forecasting for loan pricing, as well as computing point-in-time and through-the-cycle economic capital. The presentation is available here. If you would like a copy of the full academic article, please email us.

Commercial Real Estate Models...

Prescient Models has partnered with Primatics Financial to create a loan-level commercial real estate (CRE) model deployed in the Primatics Evolv platform. This leverages the same technology highlighted in the research papers above and the cash flow simulation and accounting reports of the Evolv platform to provide forward-looking answers required today by accountants and senior management.

Prescient and Primatics will offer a Halloween treat on October 31st, where we will explain the technology behind the Evolv Commercial Real Estate model and its capabilities. Registration details for the webinar will be provided by Primatics in the coming weeks. Remember, our doors are always open here in Santa Fe if you would like to visit. The sun is shining, the green chile is roasting, and the balloons are flying.

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