Impact of Local Economic Vitality on Residential Loan Portfolio Performance

Homebuyers are routinely offered “location, location, location” as the most important thing to consider when purchasing a home. Recent analysis by WAIN Street shows that mortgage investors could also benefit by focusing on property locations.

An analysis of a portfolio of residential loans held by an institutional investor demonstrated that incorporating WAIN Street’s Local Economic Vitality into a credit risk assessment framework improved default prediction by over 10%. In the case of this investor, the new information identified an additional 120 defaults in a portfolio of 20,000 loans.

Why does this work? Local Economic Vitality is a monthly subnational ranking derived from macroeconomic factors such as labor market conditions, industrial production, sales, housing market conditions, and financial conditions. From a consumer credit risk perspective, it reflects a borrower’s future income prospects. Much as residential mortgage credit risk assessment typically incorporates a view on the trajectory of home prices to gauge future borrower equity, local economic vitality supplements knowledge about borrower income stability.

The complete report is available here: Impact of Local Economic Vitality on Residential Loan Portfolio Performance.