MRE-module/__init__.py

import numpy as np
from multipolyfit import multipolyfit as mpf

GROSS_RENT_YIELD: float = 0.03686
RISK_POOL_ALLOCATION: float = 0.01
LOSS_SEVERITY: float = 0.19
RECOVERY_RATE: float = 0.9
MIN_MRE: float = 0.05


def get_default_risk_by_fico(consumer_fico: int, loan_to_value: float) -> float:
    # remember that the credit score is the first variable and the ltv is the second
    initial_fico_ltv_risks = [
        [620, 0.01],
        [620, 0.70],
        [620, 0.85],
        [620, 0.90],
        [620, 0.95],
        [660, 0.01],
        [660, 0.70],
        [660, 0.85],
        [660, 0.90],
        [660, 0.95],
        [700, 0.01],
        [700, 0.70],
        [700, 0.85],
        [700, 0.90],
        [700, 0.95],
        [740, 0.01],
        [740, 0.70],
        [740, 0.85],
        [740, 0.90],
        [740, 0.95]
    ]

    default_rates_by_credit_score = {
        620: 0.0303,
        660: 0.0201,
        700: 0.0150,
        740: 0.0094
    }
    risk_factors_by_credit_score = {
        620: [0.20, 0.61, 1.22, 1.48, 1.80],
        660: [0.20, 0.62, 1.22, 1.48, 1.82],
        700: [0.20, 0.62, 1.22, 1.49, 1.83],
        740: [0.20, 0.63, 1.21, 1.47, 1.81]
    }

    # We should now fill out the table of default rates with the LTV risk factors included
    initial_risk_factors_by_ltv_credit_score = []
    for fico in risk_factors_by_credit_score:
        initial_risk_factors_by_ltv_credit_score += list(np.multiply(default_rates_by_credit_score[fico],
                                                                     risk_factors_by_credit_score[fico]))
        
    # Compute a line of best fit
    lobf_coefficients = mpf(initial_fico_ltv_risks, initial_risk_factors_by_ltv_credit_score, 1)

    # the first coeffient is a constant offset, the second is the credit score factor, and the third is the ltv factor
    const_offset = lobf_coefficients[0]
    consumer_fico_factor = (lobf_coefficients[1] * consumer_fico)
    loan_to_value_factor = (lobf_coefficients[2] * loan_to_value)
    # now we just sum these up to get the result
    result = consumer_fico_factor + loan_to_value_factor + const_offset
    return result

def get_risk_pool_health() -> float:
    return 1.0


def compute_mre(home_value: float,
                down_payment: float,
                consumer_fico: int) -> float:
    if down_payment < 0 or down_payment > 1:
        raise ValueError('The down_payment must be between 0 and 1')

    if consumer_fico < 620 or consumer_fico > 850:
        raise ValueError('The consumer_fico must between 620 and 850')
        
    down_payment *= home_value
    investor_value = home_value - down_payment
    loan_to_value = float(investor_value/home_value)
    # the monthly payment is made on the value from the investors
    monthly_payment = investor_value * (GROSS_RENT_YIELD) / 12.0
    # how much is at risk if the occupant "defaults"
    at_risk_value = home_value * LOSS_SEVERITY
    # how much is expected to be recovered?
    recovery_value = at_risk_value * RECOVERY_RATE
    # get the default rate with the risk-factors dealt with
    default_rate = get_default_risk_by_fico(consumer_fico, loan_to_value)
    # get the risk pool allocation
    risk_pool_allocation = RISK_POOL_ALLOCATION * home_value
    # we should add the 4 month buffer that effectively halves the default rate,
    # this is already included in the get_default_risk_by_fico method.
    income_interruption_buffer = 4.0 * monthly_payment
    default_rate = get_default_risk_by_fico(consumer_fico, loan_to_value)
    # the expected loss to the risk pool
    default_rate_risk_pool_loss = default_rate * risk_pool_allocation
    # adjust the risk pool loss by the risk pool's health
    risk_pool_factor = get_risk_pool_health() * default_rate_risk_pool_loss
    # since we don't actually lose anything in the risk pool, it does not 
    # get counted toward the loss



    at_risk_value -= risk_pool_factor
    # start putting together the pieces
    mre = income_interruption_buffer
    mre += at_risk_value - recovery_value
    # make the mre a percentage of the home value
    mre /= home_value
    mre = max(mre, MIN_MRE)
    return mre

    


#if __name__ == '__main__':
#    print('Computing risk factor for consumer with 660 FICO and 70% LTV')
#    print(f'Deault Rate: {get_default_risk_by_fico(660, 0.7)}\n')
#    print('Comuting MRE for 742,500 home with 2.5% down payment and a 680 fico')
#    print(f' MRE: {compute_mre(742500.0, 0.025*742500.0, 680)}')