Measuring Consumer Resilience to Economic Stress for ABS

FICO – FICO® Scores are designed to rank-order the expected future payment performance of consumers’ credit obligations based on their credit bureau characteristics, irrespective of the economic environment. Investors may calibrate FICO Scores based on their own loan portfolios’ recent performance to predict the odds of satisfactory payment performance. However, disruptions to the economic environment put stress on consumers that can change these repayment odds in a way that differs from an investor’s calibrated estimates, leading to discrepancies between predicted and actual future default odds, and ultimately to sub-optimal investment decisions. Such disruptions reveal “latent risks” within portfolios that only manifest during periods of economic stress. Learn how FICO is measuring this risk for the ABS market.

Click here to view the full article