Consulting Corner

Data Availability and Its Implications for Behavioral Models
by Kyle G. Lundstedt, Ph.D.

1. Introduction

Investors in the secondary mortgage market have a tremendous need for models of mortgage behaviors (“behavioral models”) such as prepayment and default. Typically, behavioral models are built by combining theoretical and practical knowledge of the mortgage markets with historical data on MBS or loan behavior. Thus, the development of behavioral models is critically dependent on the availability of this data to secondary market researchers.

This article traces the evolution of data availability in the secondary mortgage market, and details the implications of that data availability for the behavioral models used by investors. In particular, we discuss how the changing structure of the mortgage market leads to changes in data availability. We conclude by discussing prospective changes in data availability proposed by Freddie Mac for 2005 Q4, and discuss potential impacts on future behavioral models.

2. Macro Models: Pre-1980

Pre-1980, the mortgage termination experience of the Federal Housing Administration (FHA) provided the only reliable source of mortgage termination and default data. By tracking early termination by cohort (origination year), the FHA published tables that related termination rates to age of a mortgage.

Beyond mortgage age, however, early behavioral models of mortgage termination depended almost entirely on macroeconomic data, primarily prevailing mortgage rates. When current mortgage rates are below the existing mortgage contract rate, households have an incentive to replace their existing fixed rate mortgage with one at a lower rate, thereby reducing their monthly mortgage payments.

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