The Deep Future Analytics CECL Study: Alternatives, Impacts, Accuracy, and Complexity
Joseph L. Breeden, Principal Investigator March 16, 2017
This study was sponsored by Allied Solutions, NAFCU – National Association of Federal Credit Unions, and OnApproach. Any opinions expressed here are solely those of the author and may not represent the opinions of the sponsors.
The new accounting rules for estimating loan loss reserves offer general guidelines and a list of possibilities, but no specific recommendations for how best to implement those rules. The current study is an effort to assess which options have the largest impact on the final loss reserve calculation. The study uses a large mortgage dataset from Fannie Mae and Freddie Mac as a test case. The results quantify the pros and cons of these options for 30-year fixed rate conforming mortgages.
The study tested a broad range of modeling techniques: time series correlations to macroeconomic data, roll rate models, vintage models, state transition models, and discrete time survival models. These models were assessed for accuracy, robustness to small data sizes, complexity, computation time, and procyclicality of lifetime loss estimates.