Table Of Content(continued from front flap) ABRAHAMS Credit
$49.95 USA/$59.95 CAN
(cid:127) How a CCAF connects borrowers, lenders, and PRAISE FOR ZHANG
investors—with greater transparency Credit Risk Assessment
C
(cid:127) The current fi nancial crisis and its implications
(cid:127) The root cause to weaknesses in loan The New Lending System for Borrowers, Lenders, and Investors r Risk
underwriting practices and lending systems
e
(cid:127) The main drivers that undermine borrowers,
“Clark and Mingyuan start with an insightful and comprehensive description of how mar- d
lenders, and investors Credit Risk
ket participants contributed to the current crisis in the residential mortgage markets and
(cid:127) Why a new generation of lending systems is needed the root causes of the crisis. They then proceed to develop a new residential mortgage i Assessment
t Assessment
(cid:127) Market requirements and how a comprehensive lending system that can fix our broken markets because it addresses the root causes. The
risk assessment framework can meet them most impressive attributes of their new system is its commonsense return to the basics of R
traditional underwriting, combined with factors based on expert judgment and statistics
(cid:127) The notion of an underwriting gap and how it The New Lending System for
and forward-looking attributes, all of which can be updated as markets change. The whole
affects the lenders’ underwriting practices i
Borrowers, Lenders, Investors
process is transparent to the borrower, lender, and investor.” s and
(cid:127) Typical issues associated with credit E
—Dean Schultz, President and CEO, Federal Home Loan Bank of San Francisco k
scoring models
New Lending System
(cid:127) H ow improper use of credit scoring in under- The xisting credit risk assessment methods
writing underestimates the borrower’s credit risk “The credit market crisis of 2008 has deeply affected the economic lives of every American. A have put too much of an emphasis on
Yet, its underlying causes and its surface features are so complex that many observers and even Borrowers, past loan performance and historical
(cid:127) The ways in which the current lending system policymakers barely understand them. This timely book will help guide nonspecialists through s for market conditions and not enough on borrower
fails to address loan affordability
the workings of financial markets, particularly how they value, price, and distribute risk.” s Lenders, capacity, new mortgage product risk character-
(cid:127) How mortgage and capital market fi nancial —Professor William Greene, Stern School of Business, New York University e and istics, and economic cycles. According to indus-
innovation relates to the crisis
try practitioners Clark Abrahams and Mingyuan
s Investors
Zhang, the housing market bubble boom and
Whether you are a borrower, a lender, or an
“This book is a well-timed departure from much of what is being written today regarding
investor, Credit Risk Assessment enables you to s burst and the subsequent financial crisis could
the current foreclosure and credit crisis. Rather than attempting to blame lenders, borrowers,
have been prevented had these underwriting gaps
better understand the weaknesses in today’s loan and/or federal regulators for the mortgage meltdown and the subsequent impacts on the m
been properly addressed.
underwriting and to better cope with fi nancial financial markets, Clark and Mingyuan have proposed a groundbreaking new framework
weaknesses toward fostering a new generation of to revolutionize our current lending system. The book is built on the authors’ deep under- e Credit Risk Assessment: The New Lending System
credit models that possess greater transparency. standing of risk and the models used for credit analysis, and reflects their commitment to
for Borrowers, Lenders, and Investors equips you
n
solve the problem. What I find most profound is their passion to develop a system that
with an effective comprehensive credit assess-
CLARK ABRAHAMS is Chief Financial will facilitate new and better investment, especially in underserved urban markets that t ment framework (CCAF) that can provide early
Architect at SAS, where he leads business and have been disproportionately impacted in the current crisis. I applaud the authors for this warning of risk, thanks to its forward-looking
important work, and urge practitioners and theorists alike to investigate this new approach.”
pexropdeuricetn dcee vienl othpem feinnta.n Hciea lh saesr voivceers tihnidrutys tyreya wrsi tohf —John Talmage, President and CEO, Social Compact BorNThe athnea lypsaesst tdheatte rdmoi nneos t threel yf uotnu ret.h eR epvreeamlinisge hthoawt
r
corporations including Bank of America and Fair oe an existing credit underwriting system can be
ww
Isaac Corporation. “In the wake of the credit crisis, it is clear that transparency is the key to not repeating e L extended to embrace all relevant factors and busi-
MINGYUAN ZHANG, PHD, is Principal hInisvteosrtoy.r sI,n C Clarrekd iAt bRriaskh aAmssse assnmde Mnt:i nTghyeu Nane wZ hLaenngd idnegs cSryisbtee ma nfoerw B olernrodwinegrs ,f rLaemnedweros rakn tdh at rs, Lend nrieskss caonndt edxrtisv ein aolrl dterra ntosa acctciounras teinly ac latsrsainfysp carreednitt
Consultant at SAS. He has over ten years of ein
einxgp eericeonncoem iicn fodreevcealsotpining,g daantad miminpinlegm, eanntd- scmeueesklttosd mtoowe rcnso’, ntrnhiseekc Atp boalrtlae hnthatiema lps. /lAaZyshe tarhns egi n fli entnhadeni cnleigan lm dsieonrdgv eicclh ecase irinnt adainundslyt rp yor forfevecirdso evs oearm sm efor noreem wh t ofhloeios tmdic of ovrrtieg twahg oeou fg ht ndersg Sys mthaen fnaecrt,s . Credit Risk Assessment clearly lays out
financial risk management solutions for the to laymen and professionals alike.” , a te This well-timed book explores how your company
financial services industry. nd m can improve its current credit assessment system
—Maria Bruno-Britz, Senior Editor, Bank Systems & Technology magazine In fo to balance risk and return and prevent future
vr
e fi nancial disruptions. Describing how a new
s
to and comprehensive lending framework can
r
s achieve more complete and accurate credit risk
assessment while improving loan transparency,
The Wiley and SAS Business Series
presents books that help senior-level affordability, and performance, Credit Risk Assess-
managers with their critical CLARK ABRAHAMS MINGYUAN ZHANG ment addresses:
management decisions
(continued on back flap)
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Credit Risk
Assessment
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Wiley & SAS Business Series
The Wiley & SAS Business Series presents books that help senior-level
managers with their critical management decisions.
Titles in the Wiley and SAS Business Series include:
Business Intelligence Competency Centers: A Team Approach to Maximizing
Competitive Advantage, by Gloria J. Miller, Dagmar Brautigam, and
Stefanie Gerlach
Case Studies in Performance Management: A Guide from the Experts,
by Tony C. Adkins
CIO Best Practices: Enabling Strategic Value with Information Technology,
by Joe Stenzel
Credit Risk Scorecards: Developing and Implementing Intelligent Credit
Scoring, by Naeem Siddiqi
Customer Data Integration: Reaching a Single Version of the Truth,
by Jill Dyche and Evan Levy
Enterprise Risk Management: A Methodology for Achieving Strategic
Objectives, by Gregory Monahan
Fair Lending Compliance: Intelligence and Implications for Credit Risk
Management, by Clark R. Abrahams and Mingyuan Zhang
Information Revolution: Using the Information Evolution Model to Grow Your
Business, by Jim Davis, Gloria J. Miller, and Allan Russell
Marketing Automation: Practical Steps to More Effective Direct Marketing,
by Jeff LeSueur
Performance Management: Finding the Missing Pieces (to Close the
Intelligence Gap), by Gary Cokins
Performance Management: Integrating Strategy Execution, Methodologies,
Risk, and Analytics, by Gary Cokins
For more information on any of the above titles, visit www.wiley.com.
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Credit Risk
Assessment
The New Lending
System for Borrowers,
Lenders, and Investors
Clark Abrahams
Mingyuan Zhang
John Wiley & Sons, Inc.
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Copyright © 2009 by SAS Institute. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form
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Library of Congress Cataloging-in-Publication Data:
Abrahams, Clark R., 1951-
Credit risk assessment: the new lending system for borrowers, lenders, and investors/Clark Abrahams
and Mingyuan Zhang.
p. cm.—(Wiley & SAS business series)
Includes index.
ISBN 978-0-470-46168-6 (cloth)
1. Credit—Management. 2. Consumer credit—Management. 3. Bank loans—Management.
4. Risk management. I. Zhang, Mingyuan. II. Title.
HG3751.A27 2009
332.7—dc22
2008054910
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
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To Judy, Brad, Candice, and my lifelong mentor, Estella Hunter.
—Clark Abrahams
To Lily, our parents, and Amy, Larry, and Gary.
—Mingyuan Zhang
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Contents
Preface ix
chapter 1 Unpacking the Financial Crisis 1
chapter 2 The Case for a Comprehensive Credit 41
Assessment Framework
chapter 3 The Lender and the Underwriting Gap 107
chapter 4 The Borrower and Loan Affordability 161
chapter 5 The Investor and Financial Innovation 207
chapter 6 Crisis Intervention and Prevention 255
Index 301
vii
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