Archive for: May, 2020

Baseline Releases and Data Validation

May 16 2020 Published by under Uncategorized

In order to measure project performances, the quality assurance department of an organization releases baselines periodically. These may be variance of actual effort over planned effort, the variance of actual schedule over-planned schedule, organizational productivity ratio, defect density, etc.,

Baselines are released every quarter or periodically. An improvement in adherence to schedule or a reduction in the defect density would imply that the organization has made improvements. For example the release may state that the organizational baseline I for schedule variance is 8.9 percent and the organizational baseline II for schedule variance is 5 percent. The conclusions may hence be that the organization has improved its schedule adherence by 3.9 percent or in other words the projects are delivering to the customers on time.

Now let us understand that such an analysis has been done on two different data sets at two different times. One data set measured the effort,schedule and other project metrics during Quarter I, the second data set measured the effort,schedule, and other project metrics during Quarter II. The mean may have significantly shifted, or the variance may have shifted or in other words, the comparison may not be being made on similar data.

For example, during Q1 the company may be executing large scale projects and during Q2 the company may be executing medium scale projects. In the case of large projects,estimates tend to have more variances and so the mean of all schedule variances hence has lowered.

Similarly, the variability between individual data points in the distribution may be significantly different due to data collection methods. During Q1 the baseline may have used a manual data collection process and during Q2 the baseline may have used data entered in the automated time management system by the employees.

When conclusions regarding baselines are derived, it is essential to see if there is a significant change to parameters which are correlated to the metric being evaluated for process improvement. More specifically, a measure such as schedule variance is correlated with many parameters such as complexity of the project, training level of the employees, work timings etc., When a result related to improvement in the performance of the process is obtained, then one should make sure that the factors on which the metric is correlated do not change significantly.

For example a mean schedule variance of 9 percent where the mean size of the projects are 20 FP should not be compared to a mean schedule variance of 5.9 percent with mean project size 10 FP or a project or a mean schedule variance of 9 percent with employees with low skill should not be compared to projects with a mean schedule variance of 5.9 percent that have employees of high skill.

In such cases one should use a statistical regression equation which expresses schedule as a function of many other variables to scale the measurements to a common base.

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Forbearance: Is It A Good Idea?

May 16 2020 Published by under Uncategorized

Don’t do it!! Don’t you dare do it!!” Some strong advice from a passionate financial expert. Barry Habib was discussing forbearance plans in a recent podcast geared toward real estate investors. I have followed Barry for a while, mostly because of his focus on lending and his extreme savvy when it comes to economics. Typically, his advice is aimed at lenders, but this was very firm advice to real estate investors. There is a lot of hype out there about forbearance agreements, and rightfully so, as they can be extremely attractive and super helpful. Some of the rumors make these sound too good to be true, so I went looking for the truth. Can ordinary investors, like you and me, take advantage of this even if we don’t financially need it? The short answer is yes, but it comes at a price.

A forbearance agreement in its simplest form is an agreement between a lender, or loan servicer, and a borrower to not make the scheduled payments as originally agreed. If we focus on real estate loans, a forbearance agreement would prevent a loan servicer from starting a foreclosure on the property during the term of the agreement. Up until now, if you entered into a forbearance agreement on a home loan, you would stop a foreclosure, but it would still be reported as missed payments on your credit.

So why all the hype? The CARES Act has made some dynamic changes around these agreements. First, loan servicers for government backed or government owned loans are required to issue forbearance agreements for anyone who wants them. Yes, that is right, anyone who wants them. In the past, these agreements were hard to get, and a borrower would need to qualify and document financial hardship. Now if the loan is owned or backed by the government, every borrower will get 180 days with no questions asked which they can extend for a second 180 period if they choose. There are no fees or penalties to take advantage of this. One important point that was a topic of confusion is that this money is not free. There may be no fees, but anyone entering into this agreement will need to make up the missed payments. An early misunderstanding was that borrowers would need to come up with one lump sum payment for all the payments that were not made. That would have created massive foreclosures, which created fear. It was because of this belief that many investors believed we would see another housing bubble burst. The truth is that each loan servicer will have the flexibly to come up with a repayment plan for each individual borrower. Although it is true that a lump sum payment is one of the five repayment options, it is not necessarily required. It is far more likely that there will be an affordable plan put in place which should prevent a massive increase in foreclosures. Other than the lump sum option, here are the four repayment options that a loan servicer could implement with each borrower.

Borrowers allowed to repay past due amount within 12 months after forbearance ends.
Extend the term of the mortgage by the exact number of months in forbearance.
Add past due amounts into loan balance and extend the term of the loan by the number of months necessary to make the monthly payment the same as the previous payment.
Add past due amounts into loan balance and extend term of loan for 40 years (480 months).
Basically, the borrower will be able to extend the loan term to make up these payments. These are specific to Fannie Mae and Freddie Mac. Other lenders or servicer for other types of loans could have slightly different options.
So, if you automatically qualify and there are no fees, why would you not do this? Here are three deadly pitfalls, which is why I believe you should avoid doing forbearance agreements on your mortgages if you are able:

Depending on your repayment option, you could accrue interest on these payments. Since most of your payment is likely interest, you will be accruing interest on interest which gets very expensive in the long run. It will limit your borrowing power. Let me explain, although it is true that the CARES Act will prevent loan servicers from reporting missed payments, the fact that you entered into this agreement will report. Not reporting the missed payment will keep your credit scores intact, but any lender looking at the payment history will see the forbearance agreement. I could not find clarity on this, but most experts believe that it will actually say, “forbearance agreement” right on the credit report for each agreement you enter into. I know this is true because three of the largest lenders in this country have already stated they will be creating underwriting guidelines around COVID caused forbearance agreements and will not extend credit for two to four years post forbearance agreement. That means by simply trying to work the system and not making payments, you could be out of the game for two to four years!! I am not sure that we will, but if this pandemic creates buying opportunities, it will certainly be before you are able to borrow again.
By not making payments on loans, it hurts the overall housing market. Taking the ethics out of this decision, the more people that take advantage of the forbearance agreement, the less liquidity lenders will have, meaning the tougher the guidelines will get. This, of course, reduces demand for housing.
The interesting thing about all this is loan servicers do not understand the ramifications for putting you in a forbearance agreement. It is the lender that owns the loan and lenders that will originate new loans that understand this, but unfortunately that is not who you are talking to when you call your mortgage company to ask about this. I want to be very clear that forbearance is a fantastic option if you need it. It helps people in need and will help maintain home values as we work through the COVID crises. I am only recommending not doing it if you can afford to continue the payments. I also want to mention that these rules and privileges are for government loans only. Third party lenders like banks, credit unions, and private lenders are not subject to these guidelines.

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