LoanBook Default Model v3
The Default Model calculates the expected Conditional Default Rate (CDR) for each loan from its sector, credit characteristics and economic conditions. CDR drives expected credit losses in CECL calculations, loss-adjusted yield in pricing, and Credit Cost in the OAS breakdown.
Methodology
Residential: Each month a loan faces three competing events (voluntary prepayment, default, and scheduled payoff at maturity), each with its own hazard. The default hazard is a logit function of FICO, LTV, DTI, loan age and a shared macro frailty factor driven by the loan's own county unemployment and home price paths. A second lien carries a higher default hazard than a first lien. Seasoning levels off at 72 months.
The shape of the residential model (which loans default more) is fit to Fannie Mae loan-level credit liquidations. Its level is set through the cycle from the regulators' own residential first-mortgage loss histories: NCUA credit union call reports from 2000 and FDIC bank call reports from 1991, through 2025. A model fit to one benign window would understate lifetime losses.
annual_cdr is the conditional default rate over the loan's remaining life, and lifetime_pd is the cumulative probability that the loan ever defaults.
Consumer and Commercial: A lifecycle (bathtub) default curve by sector and loan type (low just after origination, rising to a peak, then easing as the pool seasons), adjusted by loan-level multipliers: FICO, LTV and DTI, and for commercial real estate DSCR, debt yield and property type.
Government: The guaranteed portion has CDR 0% and loss severity 0%. A default is paid at par and counts as a prepayment.
Lease: Lease credit uses the lease program's own loss assumption.
A missing FICO, LTV or DTI makes no adjustment; the model never fills in an assumed value.
Key Parameters
| Parameter | Value |
|---|---|
| Residential hazard | Logit in FICO, LTV, DTI, ln(age), macro frailty |
| Residential seasoning cap | 72 months |
| CECL Scenario Weights | Base 60%, Adverse 30%, Severely Adverse 10% |
| Government (guaranteed portion) | CDR 0%: a default is paid at par and counts as a prepayment |
Inputs
loan_sectorResidential, Consumer, Commercial, Government, or Leaseloan_age_monthsCurrent age of the loanoriginal_ficoFICO at originationoriginal_ltvLTV at origination (combined LTV for second liens)original_dtiDTI at originationcountyCounty unemployment and home price paths for the macro factordscrFor commercial real estate: debt service coverage ratioOutputs
annual_cdrAnnualized Conditional Default Ratemonthly_mdrMonthly Default Ratelifetime_pdCumulative probability of default over the remaining life (Residential)cdr_curveProjected CDR by month over the remaining lifeCalibration
Residential shape: Fannie Mae Single-Family Loan Performance Data, credit liquidations only. Residential level: NCUA and FDIC residential first-mortgage loss history through 2025, with the basis (credit union or bank) following the institution. Other sectors: sector lifecycle curves and multiplier tables in the model configuration. CECL integration uses three-scenario weighting (Base 60%, Adverse 30%, Severely Adverse 10%).
References
- Fannie Mae. "Single-Family Loan Performance Data."
- NCUA. "Credit Union Call Report (Form 5300) Data."
- FDIC. "Statistics on Depository Institutions."
- Basel Committee. "An Explanatory Note on the Basel II IRB Risk Weight Functions."
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