Our Satchell Chan Default Forecasts (SCDF) service applies the series of models developed for us by Dr Satchell and Baron Chan at the University of Cambridge (here), to forecast arrears and possessions for the national loan book under some standard scenarios with the option for lenders to obtain forecasts under their own capital economic or other forecasts. Using the UK macroeconomic and the CML national loan book data, SCDF provides forecasts of default, derived using a three stage forecasting model. The first stage of forecasting takes the significant macroeconomic variables (unemployment, house price growth, inflation and affordability) and uses them to predict loan to value. Loan to value and house price growth are then used to predict arrears. Finally, arrears, loan to value and the significant macroeconomic variables are used to forecast arrears.

Two of the five standard scenarios represent factual downturns – the mild downturn in 1973-1975 and the 1989-1991 “worst case” recession. These two downturns are fully described in our Understanding Downturn Default (UDD) publication below. The remaining three standard scenarios are relevant to “point in time“ and “through the cycle” estimation representing the long term UK average, a severe housing shock and the current environment, all provided by major lenders. The report includes the current set of forecasts which are updated annually in May. Forecasts based upon macroeconomic scenarios of particular interest to subscribers are provided at additional cost. A prospectus and an order form are available here.

By providing the effect of possible macroeconomic scenarios upon the national mortgage book, Satchell Chan Default Forecasts provides a benchmark against which lenders may compare the default anticipated from their own portfolios. Given the specific requirements of Basel II and the need for lenders to stress their individually unique portfolios, SCDF includes a theoretical exploration of how a UK level model translates to forecast the probability of default for individual loans.

Details of the Acadametrics ASA and M-RAM solutions for forecasting default at individual loan/loan portfolio level are provided here.

Subscribers to our Satchell Chan Default Forecasts service will find our Understanding Downturn Default (UDD) research publication of great value. UDD records the post war housing downturns, in general, and the 1989-1991 “worst case”, in particular. The publication examines the historic series of macroeconomic variables to establish which demonstrate the most significant relationships with past default and can, therefore, provide us with indicators as to the level of future default. UDD then considers how, since the mid 1990s, an environment providing stable prices and low interest rates, coupled with more sophisticated lending tools, has contributed to higher levels of consumer debt which, in turn, have led to a paradigm shift in borrower attitudes towards credit. UDD is available free of charge here.

Both Satchell Chan Default Forecasts and Understanding Downturn Default will be of value to Senior Managers in informing their FSA Arrow 2 dialogue and ICAAP assessment processes.