For more information on our financial services offerings, contact us at:
Analytic Focus LLC
1116 20th Street South #406
Birmingham, AL 35205
Phone: (205) 672-9253
Fax: (205) 672-9255
E-mail: info@analyticfocus.com

Analytic Focus LLC
5218 Sagail Place
San Antonio, TX 78249
Phone: (210) 465-7838
E-mail: info@analyticfocus.com
Analytic Focus LLC
121 N Washington Street
Suite 300B
Alexandria, VA 22314
Phone: (703) 549-2682
Fax: (703) 483-3977
E-mail: info@analyticfocus.com

Risk Measurement

Risk measurement is a key concern for any financial institution. The pressure of maximizing shareholder value, of managing and protecting economic capital, and remaining competitive in tightening markets requires an institution to understand where risk is coming from and how it might change in the future. We develop models and methods for measurement of credit risk, interest rate risk, and operational risk that help planners know what risks they have in their portfolio. We work with institutions to go beyond regulatory compliance to think about where long-term value is and how risk measurement can become a tool for discerning long-term value in customers.










Problem:

Regulations governing capital requirements for multifamily loans are based in part on the credit risk associated with the loans. To be classified as well-capitalized, the Office of Thrift Supervision requires that ten percent of the value of each loan be reserved unless the loan meets a number of criteria demonstrating that the loan has reduced risk. When these criteria are met, the amount reserved may be cut in half. One of these criteria relates to the debt service ratio of the loan. For a property’s most recent fiscal year, the annual debt service must exceed 120 (115) percent for fixed rate (adjustable rate) loans. To demonstrate this each year, the institution holding the loan must have the most recent annual operating statement for the property.

Our solution:

Our client has a large portfolio of multifamily loans, many of which are for small properties consisting of fewer than 15 units. Many of the loans are well-seasoned with a long history of on-time payments and small loan balances. However, for older, smaller loans, the operating statement for the property frequently is not available. In most cases, these operating statements have not been collected over time. It is not operationally efficient to request additional documentation on a property when the history of payments by the borrower is excellent.

Two-thirds of the multifamily loans held by our client have sufficient information to determine the capital requirements. For the remaining one-third without an operating statement, our client proposed a substitute measure designed to enhance the traditional method for establishing capital requirements. Using information from their portfolio of loans and supplementing with data from external sources, our client proposed to compute an estimate of the proportion of loans with no operating statement that qualified for reduced capital requirements.

Analytic Focus designed a research program to provide an appropriate estimate of the qualifying proportion. As part of this process, a parallel study validated the number, demonstrating that the method works reliably. To conduct both studies, a random sample of loans was selected and matched to a database of multifamily loans maintained by an independent third party.

Benefit to Our Client:

For all loans in the sample, the debt service coverage ratio was computed using the net operating income information obtained and the annual debt for the property from the loan file. Using the debt service criterion, we estimated the proportion of loans in the sample that qualified for the reduced capital requirement. For loans in the sample that had an operating statement, a direct comparison was made between the information and the information from the external source. This comparison enabled the OTS to determine the validity of our procedure for estimating the proportion of loans that qualify.