Testing Stratification Rules

A critical step in building a stratification rule is to test the rule with real data. When testing, ensure that all of the instruments are included into a pool, and that the data in the pool results in accurate cash flows and financial calculations. During testing, you should also check that the rule set up is designed so that the number of pools that are created is small enough to ensure efficient processing but large enough that you do not obscure any material financial characteristics.

For example, assume that you have the following loans for which you want to develop stratification rules:

Loan A: Term = 30 Year, Interest Rate 7.25%, Balance $125,000, Start Date Jan 12, 1989

Loan B: Term = 15 Year, Interest Rate 7%, Balance $125,000, Start Date Jan 22, 1989

Loan C: Term = 30 Year, Interest Rate 7.35%, Balance $125,000, Start Date Jan 19, 1989

Loan D: Term = 15 Year, Interest Rate 7.125%, Balance $125,000, Start Date Jan 22, 1989

Loan E: Term = 30 Year, Interest Rate 12%, Balance $45,000, Start Date Jan 12, 1972

With the Stratification application engine, you can define the following strata:

Type of instrument: Fixed Rate Mortgage Loans

Interest rate ranges: Increments of .25 percent 

Balance amounts tiers:

0 to $50,000
$50,000 to $100,000
$100,000 to $500,000
$500,000 to $1,000,000
$1,000,000 to $25,000,000

Starting date: Monthly increments

Term to maturity: In discrete values

The results of stratification are three instrument pools that represent the types of loans. According to the stratification rules that you define, each loan fits in one of the following three categories:

Instrument pool #1: Term = 30 Year, Weighted Avg Int Rate = 7.3%, 
Balance = $250,000, Start Date Jan 1,1989

Instrument pool #2: Term = 15 Year, Weighted Avg Int Rate = 7.0625%, 
Balance = $250,000, Start Date Jan 1,1989

Instrument pool #3: Term = 30 Year, Weighted Avg Int Rate = 12%, 
Balance = $45,000, Start Date Jan 1, 1972

As the results indicate, all the instruments are included into a pool, and the data that is in the pool results in accurate cash flows and financial calculations. The data is designed for efficient processing, yet no important financial data is omitted.