Predicting Better Loans

at Flagstar FSB
MOONS OF JUPYTER, LLC
Executive Summary
Flagstar FSB has an opportunity to expand loan servicing contribution by $1M+
annually through predictive modeling

Moons of Jupyter used data modeling to analyze nearly 4M mortgages over the past
20 years and:
◦ Highlight costliness of servicing loans at-risk of default
◦ Fine-tune data inputs to train model
◦ Identify significant key attributes as drivers of default rates

Provides new value proposition to Government Sponsored Entities and other

investors: our mortgages have less risk, we know what to look for
Bad loans are expensive to service
Flagstar is a top-10 mortgage originator and
servicer in the US
Originating nearly 800k loans per year
Average servicing margins
◦ Good: 15bps
◦ Defaults: -25bps

Default rate is 2.9%*, higher than industry

average of 2.1%
Flagstar can lower servicing costs, improve its
reputation, improve cost forecasting on
current portfolio
Default rates from *2000-2010
Approach to Problem

Predictive
Modeling
• Fannie Mae single- • Financial forecast of
family loan data since • Train key attributes improved bps spread
2000 • Boosted trees model • Contribution Margin
• LTV, DTI, Credit Score, • Improved accuracy of expansion
etc default rates
Attribute Economic
Analysis Impact
Our model uses boosted regression trees
Benefits and overview of boosted trees model:
◦ 1. Clusters borrower profiles using attributes such as DTI, LTV, first time
buyer, and predicts based on profiles. E.g. Borrowers with DTI > 35%, LTV
>85%, and FTB have an X% chance of default
◦ 2. Compares its predictions to actual results, and then iterates based on
the bias in the results, making for increasingly accurate predictions
◦ 3. Creates easy to read outputs – list of feature importance and % chance
of default risk

Key modeling decisions

◦ 1. Dropped data from biased Great Recession years (2005, 2006, 2007,
2008)
◦ 2. Used grid search to tune parameters of models
◦ 3. Only incorporated variables that are available at the point of
origination
Economic Impact
Annual Impact of Model Use
Annual Loans Sold & Serviced 800,000 Skill Score (improvement) 4.60%
Median Loan Value $240,000 Current Default Rate 2.87%
Margin per Good Loan 0.15% New Default Rate 2.74%
Margin per Bad Loan -0.25%

Current Annual Contribution $265.9M

New Annual Contribution $266.9M
Dollar Margin Expansion $1M Margin Expansion 38 bps
Risk Factors
Average time to default is approx. 5 years
◦ Loans originated from 2015-present may deviate from historical baselines

Under-rating risk of some loans due to unrealized results Last 4 year data

False negatives risk underwriting fewer loans

◦ Value left on table
Recommendations
Create target profile for borrowers
◦ Adjust for credit score, mortgage insurance needed, property type
◦ Improved resource allocation

Benchmark recent borrowers (2015-Present) against new target profile

◦ Highlight future risks of default not captured in the dataset

Redefine sales approach to GSEs (Fannie Mae, Freddie Mac)

◦ Value proposition for reduced risk of default
◦ Negotiate lower guarantee fees or premium price for loans
Appendix
Tableau Visualizations
File created on: 1/17/21 2:24:55 PM EST
Paul Shaaf