JUNE 2004

Prepayment Risk Scores

A new product from Applied Financial Technology and McDash Analytics will roll out this month that will utilize statistical scoring to estimate prepayment risk on mortgage loans. Developed using a database of 20 million mortgages from 7 of the top 10 mortgage servicers, the scores will resemble Fair Isaac's FICO scores which are widely used to evaluate repayment risk. The new prepayment risk scorecard will be based on property location, loan purpose, credit score, and original loan-to-value ratios. Interest rates will not be incorporated into the likelihood of prepayment. An applicant's score will not change after origination, because the scoring model was developed to estimate the lifetime sensitivity to changes in rates and factors that cause people to move. Prepayment risk may eventually be incorporated into risk-based pricing for borrowers.