When buying or selling a loan pool, how should a credit union project its performance to set a price or yield? Many look at losses at a portfolio level, dividing losses over a period by the average balance. That’s useful for measuring past profitability. But for pricing, whether evaluating a participation or setting loan rates, it can mislead. Static pool analysis is more work but far more robust.
What is static pool analysis?
Static pool analysis tracks a cohort of similar loans as they age. Cohorts can be as granular as you like (new vs. used autos, direct vs. indirect) and are usually separated by origination date. Losses are aggregated by loan age to give two figures: the periodic loss rate and the cumulative loss rate, both as a share of original balance. The same method works for delinquencies, prepayments, balance or coupon.
The result, cumulative losses and loss timing, can be used to evaluate similar future pools and blended into portfolio estimates, an important step in CECL.
Portfolio-level analysis
Portfolio analysis tracks performance by calendar month rather than loan age, and divides by current or average balance rather than original balance. The two methods agree only when roughly equal dollar amounts of loans sit at each point of seasoning. For a cohort with 1% cumulative losses and a 3-year WAL, both show 33 bps of annual loss once the portfolio is 36 months seasoned. At a 20% CPR, WAL shortens to 2.2 years and both rise to 45 bps.
Where they diverge: origination growth
Growing origination volume means more new loans, which have lower loss rates, so portfolio-level losses look too optimistic. Against a true 45 bps, a portfolio growing 10% a year shows 43 bps, 20% growth shows 41 bps, and 50% growth shows 35 bps. That isn’t hypothetical: by LoanStreet’s estimate from Callahan & Associates data, average credit union auto origination volume rose almost 60% from 2021 to 2022.
The reverse also holds. If originations fall 25% a year, portfolio-level losses level off at 51 bps after peaking at 60 bps.
The bottom line
Portfolio-level loss analysis has value for estimating portfolio returns. For setting loan rates or analyzing a participation, static pool analysis is the gold standard.