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Subprime Lending Analysis

Publications

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Supported leading real estate finance scholars Jacob L. Vigdor, Ph.D., of Duke University and Todd Sinai, Ph.D., of The Wharton School in assessing the roots of the subprime mortgage crisis and evaluating the likely impact of various legislative and regulatory proposals to address the crisis. Working with Dr. Vigdor, Bates White laid out the major considerations that should underlie any policy that would effectively bail out borrowers or financial institutions or impose moratoria on loan enforcement. Click here to view paper Working with Dr. Sinai, Bates White quantified the likely geographic and income distribution of increases in the conforming loan limits, demonstrated that foreclosure rates were driven more by exogenous economic forces than by borrower or loan characteristics, and measured the true costs of freezing loan teaser rates. The analyses were widely distributed to leading federal and state lawmakers and were cited in the Wall Street Journal. The client was a public relations firm seeking to improve the quality and objectivity of discourse on this emotionally charged subject.Click here to view paper

Engagement Experience

•	Provided statistical services to a top 10 subprime mortgage originator involved in litigation regarding yield–spread premium policies. Analyzed each pricing and credit underwriting factor to determine its impact on the rates and fees charged to each customer. Evaluated the pricing, underwriting, and exception procedures to identify the potential disparate impact of lender’s policies and procedures.
•	Submitted expert report for and testified on behalf of an insurance company in a dispute between the company and its auditor. Analyzed the company’s subprime commercial lending portfolio and estimated losses on various high–risk loans.
•	Our experts directed statistical and economic analyses on behalf of a major financial institution with multiple prime and subprime mortgage business units. Developed statistical models to detect pricing disparities between protected and unprotected classes and to analyze the relationship between its mortgage pricing strategies and credit risk. Developed alternate risk-adjusted pricing algorithms and credit–scoring models to reduce adverse impact without sacrificing predictability.
•	On behalf of Mitsubishi Motors Credit of America (MMCA), provided direct and cross–examination testimony regarding expected credit losses for loans originated by MMCA and subsequently sold to Household Auto Finance in ADR proceeding of HSBC Auto Finance, Inc v. Mitsubishi Motors Credit of America, Inc. Demonstrated that the credit loss information submitted by the offeror during the due diligence phase of a loan portfolio sale accurately reflected the credit quality of the portfolio. Successfully challenged the purchaser’s damages estimate. Arbitrator found that the purchaser’s damages calculation was highly speculative and not supported by the evidence.
•	Served as testifying expert in litigation involving the subprime automobile finance industry. The litigation, brought by the monoline insurer of the ABS portfolios, involved breach of servicing contract issues and required a detailed forecast of “but-for” net credit losses. Evaluated reasonableness of various sets of credit loss forecasts. Prepared two expert reports that analyzed industry structure, evaluated underwriting and servicing practices, forecasted credit losses for damages purposes, and rebutted opposing experts’ methodologies. Testified in two depositions on the content of two expert reports.
•	On behalf of various consumer finance clients, our experts have evaluated hundreds of subprime structured finance transactions to develop estimates of expected cash flows and expected credit losses. Forecasted default frequency and loss given default for each transaction based on initial collateral performance. Developed credit loss forecasts for new structured finance transactions.
•	Researched and analyzed market position and product revenues for a $10 billion multi–faceted consumer finance company on behalf of a prominent investment group. Conducted in–depth investigation of finance company’s auto finance, mortgage origination, mortgage servicing, and subprime business units.
•	Our experts have developed and managed the marketing department for a major subprime auto finance company. Created four new direct marketing programs. Aligned price and risk-on-product tiers to achieve above–hurdle ROI performance on all products and customer segments. Constructed target population segmentation algorithms to maximize ROI and NPV of marketing expenditures. Built and instituted credit risk models to lower risk while raising approval rate. Marketing and product improvements resulted in 100% growth rates while reducing credit risk exposure.
•	Our experts helped pioneer a leading financial services company’s first acquisition and integration, which resulted in a several–fold return on investment. Constructed valuation and negotiation strategy for acquisition of privately held subprime consumer finance company and identified key areas of synergy. Analyzed subprime auto finance industry profitability by connecting FASB P&L statements with true underlying cash economic returns. The acquisition established the company as a leading and highly innovative lender in its industry.