MReport November 2017

TheMReport — News and strategies for the evolving mortgage marketplace.

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24 | TH E M R EP O RT FEATURE ARE YOU LOOKING FOR A BEST IN CLASS SOLUTION TO AVOID... • Missed Parcel • Late Payments • Costly Penalties/Interest • Tax or HOA Liens • Foreclosed Properties • Tax Sales • Missed Flood Zone Coverage • Compliance Issues TIRED OF DEALING WITH ISSUES THAT ARISE WHEN SERVICING YOUR REAL ESTATE PORTFOLIO? 130 S Jefferson Street, Suite 300 Chicago, IL 60661 1.888.627.5494 versus lifetime (CECL) credit loss projections and reporting in models and report genera- tion; and Estimate credit losses for future draws on commitments for IFRS and for commitments that cannot be unconditionally canceled for CECL. Planning for CECL T here are definite steps that organizations need to take to prepare for integrating these standards. This will start with defin- ing a revised governance standard for CECL, establishing a steering committee/task force with members currently in high-level positions in finance, originations, credit, and operations who have management backing. This team needs to be given budget and action authority to implement prescribed procedures. Then, as required, firms will need to identify appropriate external consultants and partners who can participate and contribute to the process, and should seek ways to integrate them into the process early. These firms should be able to create and/or evaluate mod - els for conformance with the new standards. Next, these teams will determine the resource needs involved in each area and inventory what exists today, beginning with performing initial portfolio segmentation of all loan, lease, and debt assets held, determine what data is needed, and what models and the technology needs by portfolio. The committee will need to examine existing models and methods used in the ALLL process to determine which have the potential to meet the new requirements. Generally, cash flow forecasting models offer potential, and static models do not. Firms will perform pilot evalu - ations of the potential impact of CECL on the financial statements and the organization over the next two years, and then develop revisions to policies and procedures, to audit policies, and to model risk management practices. These findings will be used to build the "how-to" document or "roadmap". Key objec - tives and milestones should be set along these lines: 1. Segmentation 2. Warehousing 3. Metrics 4. Modeling 5. Scenarios Portfolio Segmentation: Segment the loan, lease, and debt portfolio into meaningful segments, so that then, firms can appropriately define data elements needed for each. This leads to identification of the critical statistical drivers of performance, which will be used in the mod - eling and reporting, and defining data models. Establish Data Warehousing: The CECL plan should include the data warehousing and capture infrastructure, tools and data models required, which will require implementa - tion of powerful data capture methods, in monthly snapshots, including credit data and performance data. Firms will need to obtain and reconstruct as much historical data as possible, plus review existing and alternative models, research credit modeling, loss model - ing, and voluntary prepayments modeling. Firms must identify models that can be used or repurposed for different products, in- ternal and external, and identify leverage op- portunities and efficiency gains from current models, processes, workgroups, and modeling approaches (ALLL, DFAST, or internal vs. vendor models). Develop Metrics and Assumptions: MIAC helps firms use these data models to develop key reporting metrics and descriptions of the driv- ers used in the credit, loss, and prepayment models; determine assumptions; and drive the Outline of FASB's CECL Implementation Process Segmentation of Asset Types Aggregation and Analysis of Historical Data Development of Scenarios Asset Cash Flows Modeling Historical Loss Experience Qualitative Factors Numerical Output and Assumptions for Narrative

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