4. Non-Agency Loan Level Models: 1990 and beyond

The next advance in data availability came about during the resolution of the S&L crisis in the early 1990’s. The Resolution Trust Corporation (RTC), in its role disposing of the assets of failed thrifts, set new standards of data disclosure, providing very detailed information on the collateral underlying its securities. As the non-agency market began to develop during this same period, non-agency issuers followed the RTC’s lead in terms of data availability, disclosing loan-level data in order to induce investors to hold their securities.

Hence, "loan level" analyses were the next mortgage modeling innovation resulting from changes in data availability. These loan level behavioral models attempted to explain why, despite good performance by pool level models, apparently identical pools still showed a significant level of unexplained variation in termination behavior.

For example, Stern (2002) looked at jumbo, non-conforming fixed-rate residential mortgages, characterized by both their large original balances and their lack of any private or government sponsored mortgage insurance.³ While the prepayment characteristics of jumbo fixed-rate loans were similar to agency loans, the additional loan level variables used generally increased the precision of such behavioral models.

In addition, rather than estimating a conditional termination rate (fraction of pool terminating), many researchers actually observed whether or not individual loans terminated in a given month. As a result, they took advantage of advanced statistical techniques, such as hazard models, that explained both "if" and "when" a loan would terminate.