Dear Hilary – Expected Loss by Probability of Default
October 2017

Dear Hilary,

We are currently working on using Visible Equity’s expected loss by probability of default figure to set reserve amounts, and we were wondering how the probability of default is calculated?

Sincerely,
Default Questions

 

Dear Default Questions,

A loan’s probability of default is calculated using a proprietary regression model that analyzes the influence of several variables such as credit score, LTV, interest rate, etc. to arrive at an actual probability of the loan defaulting. The probability of default is estimated over the entire life of the loan.

Since the probability of default is a component in the expected loss model, the expected loss by probability of default looks at the entire life of the loan as well.

Happy Friday!
Hilary

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