Vintage analysis 101
The title of this edition, ‘The risk within the risk’ is a testament to the amount of information that can be gleaned from an assessment of the performances of vintage analysis pools.
Vintage analysis pools offer numerous perspectives of risk. They allow for a deep appreciation of the effects of loan maturation, and can also point toward the impact of external factors, such as changes in real estate prices, origination standards, and other macroeconomic factors, by highlighting measurable differences in vintage to vintage performance.
What is a vintage pool?
By the Experian definition, vintage pools are created by taking a sample of all consumers who originated loans in a specific period, perhaps a certain quarter, and tracking the performance of the same consumers and loans through the life of each loan.
Vintage pools can be analyzed for various characteristics, but three of the most relevant are:
* Vintage delinquency, which allows for an understanding of the repayment trends within each pool;
* Payoff trends, which reflect the pace at which pools are being repaid; and
* Charge-off curves, which provide insights into the charge-off rates of each pool.
The credit grade of each borrower within a vintage pool is extremely important in understanding the vintage characteristics over time, and credit scores are based on the status of the borrower just before the new loan was originated. This process ensures that the new loan origination and the performance of the specific loan do not influence the borrower’s credit score. By using this method of pooling and scoring, each vintage segment contains the same group of loans over time – allowing for a valid comparison of vintage pools and the characteristics found within.
Once vintage pools have been defined and created, the possibilities for this data are numerous…