Mortgage Profitability
The Effective Yield Calculator (EYC ) Analytics is a methodology and software suite for analysing and differentiating the lender’s Mortgage Loan Portfolio into its various constituents, to facilitate measurement and tracking of its segmented income, costs and net profitability
Mortgage Portfolio Profitability
Why it is needed?
It is a truism to say that ‘one cannot manage what one cannot see (and measure)’. Accordingly, accurate calculation of net profitability is essential for many purposes:
- Acceptance or rejection of the application on Day 1
- Determining the maximum loan to value ratio
- Determining the optimum maturity of the loan
- Risk pricing the loan to allow for measured probabilities of default
- Prioritising loans for collections management, based on measured risk
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For the evaluation of the portfolio for sale or purchase (where different loan types and mortgages are not differentiated it is easy to average and thereby, by invisible cross-subsidisation, to confuse the profitability of the alternative sub- portfolios)
Differentiation of mortgage types and individual sectors is essential for strategic portfolio pricing
Our Approach
Our Approach to Clients
- Credit Expo’s software is full, sophisticated, actuarially constructed and capable of capturing and tracking all loan characteristics. However, the operation of EYC, as with ECM Analytics, can be restricted by the availability, depth and history of the bank’s own data.
- Subject to availability of data and intended functionality, the installation of the EYC software can take up to two weeks. Installation is undertaken under licence and pricing is agreed with the client
- On receipt of an enquiry on mortgage profitability measurement, Credit Expo visits the client and notes both the data and the purpose of the bank’s requirement, i.e., whether simply for compliance reporting or for more precise profitability management and M&A work. Credit Expo then advises the bank on the fields required to be captured, the longevity required and best immediately available outputs, while new data is captured thereafter to add functionality for the future.
Mortgage Portfolio Evaluation
Designed to be end-to-end, ECM covers all operational aspects
Evaluation
EYC Analytics is a methodology and software suite for analysing and differentiating the lender’s Mortgage Loan Portfolio into its various constituents, to facilitate measurement and tracking of its segmented income, costs and net profitability. This analysis is required under IFRS 9 for regulatory compliance. Equally importantly, it is required for overall effective management of the loan portfolio e.g. for the acceptance and accurate pricing of new business and for the prioritisation and management of mortgage arrears.
Synchronising mortgage costs with mortgage income recognition
EYC is an IFRS – compliant solution which distributes mortgage costs and provisions in line with mortgage income, for more accurate profitability measurement over the lifecycle of the portfolio.
This product was developed to differentiate and manage profitability in one bank’s very large mortgage loan portfolio.
EYC enables the bank to identify aspects of cross subsidization across the various standard sub-portfolios e.g.tracker versus other loans, fixed rate versus variable rates etc. and thereby to differentiate and improve cost and risk pricing within the bank’s overall mortgage portfolio.
EYC employs precise calculations of net income and adjusts for variations over time e.g. interest rates, redemption patterns, mortgage origination and other costs, new business levels and changes in the economy.
EYC provides flexibility to the lender to differentiate the profit performance of alternative mortgage types and loan maturities.
- Increasingly, Banks trade in mortgage portfolios (Mergers and Acquisitions) to facilitate the funding of new portfolios for expansion, so it is critical for both buyers and sellers to measure these portfolios accurately for accurate pricing.
- In the past it was usual to receive and recognise mortgage income over the lifecycle of the constituent loans, but to post all costs in year one, thereby depressing the reported early profitability of the portfolio (also reducing front-end corporation tax!).
- Today it is recognised as essential to differentiate all mortgages, to note their individual income streams, by reference to maturities and interest rates and then to distinguish their individual provisions and costs and to calculate their individual net profitability for pricing.
- While the "explicit’’ costs of the mortgage were identified and were formerly distinguished, viz, Insurance charges, Brokerage and Discounts and were sometimes redistributed appropriately, other invisible costs were even more important over the loan lifecycle and were often missed, viz, differential funding costs (e.g. for fixed versus variable rate loans), administrative overheads and impairment. For proper discrimination and profitability maximisation, especially for sale, all these costs must similarly be distinguished and redistributed for M&A purposes.
Key Benefits
- Delivers IFRS compliance
- Distinguishes important cost differences
- Accurate month end reporting
- Transparency of net profitability and
- Significantly enhances overall Portfolio profitability.
- Greatly assists in portfolio evaluation for M & A work
Complimentary Consultation
We would be delighted to undertake a complimentary consultation to show you our approach and identify where we can be of assistance to your organisation in reducing credit risk.
