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Time series analysis increases predictive power and enables extraction of meaningful conclusions from even moderate short lived vintages and newer product types.

Loan pools have natural distribution of default over time. Initially the defaults are low but with time particularly years between 3-5 it is tricky. These are mainly because of influence of economy like unemployment rate declining market value. So these trigger the default rate to increase. So only by performing Time Series Analysis in the development phase and analyzing new pools using time series model to pool performance accurately reflect the interactions of economic influences on the natural default pattern. Exact shape of economic path is crucial element of loan performance.

Economic conditions such as unemployment rate have its effects on default rate so moody's included this parameter in their analysis.

Moody's mortgage metrics uses time series analysis as an appropriate mathematical tool as a factor which effects binary decision.

When analysis individual loan risk in the pool Moody's stress more on default frequency and default severity. Default frequency is chance or probability that the borrower gets defaulted and will reach foreclosure and default severity is total amount of loss it incurs if the loan gets defaulted.

While evaluating both default severity and default frequency, moody's consider many input parameters such as;

* Loan to value ratio is one important parameter which gives information on borrower's equity. Borrower's equity is very important because it gives information about borrower's ability to withstand any economic situation. And loan to value ratio gives perfect idea of the borrower's equity.

* Borrower quality is one main important parameter and plays main role in the outcome of default foreclosure and default severity calculations. Borrower quality is analyzed using borrowers credit score of FICO. Credit score alone doesn't give borrowers quality so moody's consider frequency, duration, and time since any mortgage delinquencies, performance on consumer credit loans, length of employment, and income history. The post-mortgage debt service to income ratio (DTI) as other parameters in analyzing borrowers quality.

* Originator and servicer practices are crucial in determining default frequency. Borrower quality alone doesn't give perfect picture of borrower's quality. So it is very important to analyze originator practices in lending mortgages such as Past performance of the originator's loans; underwriting guidelines for the mortgage loans and adherence to them; Loan Marketing practices; Credit checks made on borrowers; Appraisal standards; Experience in origination of mortgages; Collection practices; and Loan liquidation procedures.

* Loan term gives an idea principal retirement and borrower's equity accumulation. Shorter the loan term higher will be monthly installments and longer the loan smaller will be monthly installments. If the borrower doesn't have enough cash at disposal, it is more likely he get defaulted having a short loan term.

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