To: Collections Manager
From: Risk Manager
Subject: Mortgage Underwriting – Pre-Live Strategy Testing & Stress Testing
You’re already familiar with simulating the portfolio results before going live with your new strategies. You have time to run three trial simulations on the portfolio, each of which has a one year outcome period. Based on this you can finalize your decisions before going live in the final run. First, you’ll need to test your assumptions for application score cut-off and the macroeconomic environment. Second, you’ll want to stress unemployment since we foresee some economic stress on the horizon.
(1) Application Score Cut-Off: As you know, collections management is part of our overall business planning process. As such, we need your review and recommendation for the application score cut-off based on the portfolio data you’ve reviewed. Make your recommendation in the spirit of working as a business partner with Risk and Operations. As part of your new role, you are responsible for providing feedback concerning changes in customer payment behavior to other parts of the team and to the business manager. Until we return the portfolio to sustainable financial health, we’ll require your sign-off on the underwriting strategy.
(2) Macroeconomic Environment: Second, you can stress test the portfolio using the unemployment rate as a broad proxy for payment stress on our borrowers. We expect some economic stress in the coming year, so you’ll want to use the trial runs in your pre-live environment to understand potential customer and financial behavior when under stress.