S&P Revises Method To Assess House Price Volatility

April 4, 2002

NEW YORK, NY -- An improved methodology for estimating house price volatility in 199 metropolitan statistical areas (MSAs) throughout the U.S. became available earlier this week, according to Standard & Poor's.

"The House-Price Volatility Index (HVI) is determined through a blending of three components that assess each MSA's volatility," writes Terry Osterweil in an article titled "Methodology Revised for Estimating U.S. House Price Volatility." Mr. Osterweil, a director in the Residential Mortgage-Backed Securities sector, said the revised methodology is incorporated into Standard & Poor's LEVELS version 5.5 mortgage model.

"The first component is an econometric model based on a logistic regression that, for each MSA, estimates the probability of a year-to-year decline in the three-year moving average of house prices," he said. "The second and third components are based on historical three-year price changes. The second component determines the probability of a decline in house prices over the next three years by estimating a probability density function for the historical three-year price changes, providing a measure of each MSA's long-term stability. The third component is a measure of the volatility of the long-term growth in house prices based on the coefficient of variation for each MSA."

The MSAs are ranked by their index score, with the lowest scores representing the MSAs least likely to experience a decline in house prices should a U.S. economic downturn occur. The score determines how the loss severity of loans in such MSAs are adjusted in Standard & Poor's model. Properties in MSAs with low scores receive a reduction in the Market Value Decline (MVD) assumption used. The reduction lowers the related loan's loss severity and ultimate credit enhancement required. On the opposite end, properties in MSAs with high index scores receive an increase to the MVD assumption used. This in turn increases the loan's loss severity and ultimate credit enhancement. MSAs with moderate scores receive similar treatment based on a scale of MVD adjustments. By determining an overall index score based on the three methodologies, Standard & Poor's is better able to assess those areas most likely to suffer a decline in home prices and make adjustments to the potential loss incurred by loans in those areas.

The report is available on RatingsDirect, Standard & Poor's Web-based credit analysis system. It is also available at www.standardandpoors.com. To access it, click on "Forum"; then, under "Ratings Commentary," select "Structured Finance"; and the report is listed under "Residential Mortgage-Backed Securities Ratings."

Source: Standard & Poor's

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