DebtX Insights: “Nothing in life is to be feared. It is only to be understood.” –Marie Curie

As the nation’s largest provider of loan level fair value to banks, insurance companies, funds and government agencies, it might seem that we could easily guide our clients through the pricing maze given our access to unparalleled amounts of new origination and trade data from our various internal platforms.

In fact, it’s quite the contrary. Rarely do we see what is needed to capture the desired quarry. Instead, we see stale loan data, and that is a big hurdle in terms of knowing what may be lurking in the shadows.

Inaccurate credit characteristics are particularly troublesome in times of economic stress.  Many lenders do not update important data like LTV, DSC, DTI, etc., post origination.  Some only update annually.  Further, it is not just a few lenders here and there. It’s a systemic problem.

Calculating fair value without updated loan information will not reflect the performance of the credit. Certainly, spreads will be much wider in any modeling exercise during times of tumult, and prices will change around the margins. However, the downside can be muted if the key credit factors are consistently overstated.

Thus, if management teams are not currently stress testing and looking hard at loan-level credit factors, they are missing the bigger potential downside. To maintain a firm grasp on risks to capital, it is essential to make realistic estimates about collateral performance.  And why not formulate a plan now, before regulators focus on the issue?

DebtX has proven stress testing solutions to help institutions better understand their portfolios for when markets head south.

DebtX runs all calculations and provides outputs in the format that best fits each bank’s accounting platform. DXCDA leverages the most robust historical data set in the market for both performing and non-performing loans. And as an added bonus, DXCDA can also be used for your firm’s CECL calculations.

Will Mercer, Executive Vice President – Analytics

Learn more about DebtX Stress Testing & Scenarios.

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