Credit Modeling Tool to Aid Default and Prepay Analysis.(Loan Dynamics Model)

NEW YORK -- Andrew Davidson & Co. Inc. has launched "Loan Dynamics Model," a credit valuation tool designed to project delinquency, default, loss severity and prepayment on non-agency mortgage loans, the fixed-income risk analytics provider said.

Company president Andrew Davidson said the Loan Dynamics Model is more than a new option, since it introduces an innovative approach to credit modeling, "standing at the threshold of a new era in mortgage loan dynamics modeling."

"We view that this is a scenario where this [credit modeling] is an area where there's going to be some dramatic evolution," he told MSN.

According to Mr. Davidson, "There is substantial agreement among analysts as to how the major factors interact," yet even though "prepayment models have become quite sophisticated over the past 20 years," credit modeling has not advanced "to the same level."

The models used by the industry today "are mostly scoring models that basically say this is a good loan, this is a bad loan, which is not to say they are simplistic," he explained. "They may have very complex features to them but they are not dynamic."

Both prepayment and credit modeling products tend to be expensive, but Mr. Davidson believes it is worth investing in loan security and understanding the dynamic nature of the risks one faces. He sees two main challenges to new credit tools, consistently getting good historical data and, more importantly, finding ways how to take the model and deliver it to the investor, primarily because there is a lot of data that needs to go into the analysis, plus there is a computation issue at the loan-level analysis.

"A combination of needing a lot of data and then a lot of computation makes it difficult to create and deliver analysis," he said. Users need to get a wide range of scenarios because to be able to see what the distribution of possible outcome is "and that takes a lot of computations."