FI Provides Insight into a Large Financial Institution’s Distressed Asset Valuations

FI creates highly efficient processes that renewed confidence in the large financial institution’s NPL, RPL, and REO valuations.

Client: Large Financial Institution

Challenge: Our client needed technical expertise to create and maintain a repeatable and auditable process for valuing their Non-Performing Loan (NPL), Reperforming Loan (RPL) and Real-Estate Owned (REO) portfolios. With increasing pressure to start reducing their whole-loan assets, the financial institution requested FI Consulting to support existing production processes for the Mark-to-Market (MTM) valuations, and to refine critical processes to create a more accurate and controlled method.

FI Solution: FI supported the client’s NPL and RPL valuation process by creating a multi-dimensional grid with which to attribute loan-level pricing from several dealers for a ~1% sample tape of the client’s NPL and RPL portfolio. Additionally we conducted monthly color calls with various large buyers and sellers in this asset space, and conveyed market movements to the financial institution’s capital-markets risk and pricing teams. After gaining considerable knowledge in this space, we were able to automate production cycle processes to shorten the monthly close cycle by over seven business days. FI implemented SAS and MS Excel-based automatic reports in each step of the production cycle, with documented controls to insure precision. We also created a SAS-based algorithm optimize grid dimensions in order to gain more accuracy in price attribution.

FI took large roles in supporting multiple releases for the Asset Mark-to-Market (AMTM) and Real-Estate Owned Valuation System (REO-VS) applications. We worked with development teams on the AMTM application to create more efficient and accurate pricing grids for NPLs and RPLs. We also created User Acceptance Testing (UAT) test cases to test new calculations for Collateral-Dependent Values (CDV) on the client’s REO and FAS114 populations.

FI analyzed different vendor models in the REO property-value space to help management make decisions on which models to use. FI compared model values to historical offers and sales to calculate accuracy on the financial institution’s REO population. We also automated month-end reports for the REO valuations using SAS and VBA, and examined the current process to ensure that all model components worked as designed and were conceptually sound.

FI Impact: FI was able to created highly efficient processes that passed audits and renewed confidence in the client’s NPL, RPL, and REO valuations. We were able to effectively predict and communicate pricing changes due to application releases and process changes. Our analytics allowed senior management to make informed decisions on major production cycle modifications. Our support on multiple releases allowed development teams to hit deadlines while also being compliant with policies and procedures. Throughout this whole project, FI was able to make senior management comfortable that their distressed-asset valuations were not only correct, but also more accurate and transparent.