Insights & News

Credit Regimes and the Race against Defaults

When times are good, it’s easy to forget that they’ll end, even if the endpoint is unknown. Forgetting that can be very costly. We explain how the big risk builds during calm times. Losses in subsequent bad times can only be managed in good times. We hint at a new service that measures the risk to manage.

Credit Regimes: the Race Against Default Waves

The Good, the Bad and the Ugly

We extend our Fort Myers Fannie mortgage loss analysis by showing how loans, ranked by expected loss rates and updated LTVs, perform if home prices decline 57%.
We then compare 2007 and 2025 portfolios to show why a crisis could re-occur.

The Good, the Bad & the Ugly

private credit

Private Credit’s early growth resulted from regulated banks retreating from making riskier loans. With its capital structure, PC maintains an incentive to make riskier loans than banks. Credit losses tend to be either large or small, with no in-between, and we’ve been in a low-loss state for awhile. PC’S recent success may be attributed to the wrong factors.

Was Private Credit Fooled by Its Own Success?

ft myers

Certain previously “hot” home markets have had recent price declines. For one market–Fort Myers MSA–we asked how much could mortgages lose if prices continued to decline like they did in the financial crisis? The answer: a cumulative 8.57% vs. 10.3% in The Crisis. That’s a lot!

Fort Myers Mortgage Losses: A Repeat of The Crisis Would Be… a Crisis

tob

Seasoning curves show defaults or losses as a function of loan age or time-on-book (TOB).
Using publicly-available Fannie Mae mortgage data, we show the vacuity of the notion and the relationship. TOB is an insufficient statistic for more fundamental risk factors that can be directly used.

Time-on-Book is Pyrite

Quarterly default rates by annual vintage, 2009 - 2022.

stress testing

Banks estimate what they could lose in stress tests. Credit losses exist in regimes — long stretches of low losses punctuated by sharp, severe transitions. The only value of stress testing is deciding what to do before the shift happens, but most banks don’t. They should use the results to know when to hold, when to fold, when to walk away and when to run.

Regimes, Risk Management & Stress Testing

Hurricane post

Hurricanes present a unique challenge: defaults rise but losses given default fall, typically canceling out. This inverse relationship contrasts with normal times when both move together, making it essential to account for in your models.

Do Hurricanes Affect Mortgage Losses?

credit cards

Among politicians and the public, there seems to be bipartisan support for a credit card interest rate cap (at 10%). Almost everyone is in favor of free stuff—why not zero rates—but there is no free lunch.

What Will Happen with a 10% Cap on Credit Card Rates?

Conference

how to incorporate tarriffs

With the uncertainty and possible economic harm surrounding the recently-announced tariffs—whether they stay, disappear, reappear, or mutate—bankers face the challenge of integrating effects into CECL and stress test estimates.

How to Incorporate Tariffs into Loss Forecasts

are banks ready for downturn

It’s been fifteen years since the last long and deep downturn. Alas, periods of calm are not proof of resilience against harm, and in fact, they may obscure risks that may define the next downturn.

Are Banks Ready for a Downturn in 2025?

podcast-new

Mayer Brown regulatory partner, Matt Bisanz, and CEO Andy Spero talk about trends and best practices for managing risk – and advice to those just starting out.

CEO Andy Spero Interviewed on Risk Management Podcast

bank reg

A common belief is that broader and deeper bank regulations decrease earnings and share value.

Would SVB’s, SBNY’s, and FRCB’s shareholders agree?

Will More Bank Regulation Reduce Share Prices?

silicon valley

Nine initial impressions of the Fed’s report on SVB including why we anticipate more supervision and attempts to reverse the loosening of scrutiny in 2017 – 2020.

Bank Regulation after Silicon Valley Bank

hurricane-mtg-new

Climate Change, Extreme Weather and Loan Losses. We analyze differences in default rates, LGDs, and loss rates for mortgages in four recent and costly storms.

How Do Hurricanes Affect Mortgage Losses?

never-about-capital-new

Since Silicon Valley Bank’s demise, many have been yapping about the importance of capital and capital ratios, but it’s never about capital. It’s always about liquidity!

It’s Never about Capital… It’s Always about Liquidity!

thoughts on silicon valley new

Andy Spero explains what he concluded from the Fed’s discount window seemingly turning SVB away, and his thoughts on why the FDIC rushed to close SVB down.

Thoughts on the Silicon Valley Bank Debacle