LoanBook Novel Metrics

Novel Metrics provide risk signals beyond traditional credit metrics (FICO, LTV, DTI). They capture underwriting quality, prepayment option value, geographic risk, and origination channel effects that standard metrics miss. Each metric has been validated against Fannie Mae Single-Family Loan Performance Data.

Methodology

Seven core metrics plus two composite scores:

1. Underwriting Tension Index (0-1): Measures how close a loan is to guideline limits across LTV, DTI, FICO, and rate. A loan at 95% LTV, 49% DTI, and 620 FICO is at maximum tension: any deterioration triggers default.

2. Borrower Optionality Score (0-1+): Quantifies the borrower's ability to refinance based on credit and equity headroom. High optionality means higher prepayment risk.

3. Geographic Momentum Mismatch (±0.2): Captures the risk that home prices at origination were at a cycle peak. Calculated as (HPA at origination - HPA current) × LTV.

4. Payment Capacity Cushion (0-2+): The ratio (max allowable DTI - actual DTI) / actual DTI. A large cushion means the borrower can absorb payment increases.

5. Rate Lock Vintage (bps): The difference between the note rate and the market rate at origination. Positive values indicate the borrower locked above market (less refinancing risk).

6. Collateral Complexity Score (0-1): Measures liquidation difficulty based on property type, unit count, and occupancy. Multi-unit investment properties score highest (hardest to liquidate).

7. Channel Quality Proxy: Origination channel risk adjustment. Retail originations have the best quality, broker originations the worst, based on empirical default rate differentials.

Credit Risk Composite (0-100): Combines tension, complexity, channel, and cushion. Prepay Risk Composite (0-100): Combines optionality, rate vintage, and geographic momentum.