Overview of Loan Portfolio Analysis

In this chapter we delve into the analysis of loan portfolios. As one of the main raw materials of securitization, large portfolios of loans require specific formal and practical tools for their analysis and we go through the main ones in this part of the book. The first section categorizes the various types of loans that one might encounter, and explains why at the core all these sorts of loans can be analyzed in a similar way. We nevertheless contrast corporate and consumer loans and how their differences lead to a differential treatment in securitization. Then we look into a loan’s life cycle and how that can be represented as a transition matrix. Next, we discuss loan performance metrics and a few conventions. We then address loan behavior and discuss the drivers of prepayments and defaults, without going into the details of advanced modeling. We apply the general framework of loan behavior analysis to loan-level data on agency mortgages. We study refinancings and other forms of prepayment patterns, delinquencies and loss severities, and propose basic empirical models that capture their essential drivers. Next, we lay out practical methods for modeling loan cash flows, which are essential as an input into structures. Finally, we take a look at some formal ways of representing loan performance.