Valuation Commentary

AD&Co Weekly Market Analysis: A Fresher Look and Deeper Content
by Alex Levin

Many of our clients are avid consumers of our weekly OAS reports that cover agency 30-yr TBAs – Fannies (FNCL), Freddies (FGLMC), and Ginnies (GNSF). Some of them have made these reports an important part of their valuation and risk management. These reports have been available on-line from AD&Co for over 7 years. The reports have changed over time, reflecting the dynamics of the MBS market and professional views. For example, in 2001 the firm started adding “implied prepay model” results; 3 years later this became a well-defined “risk-neutral” analysis. The look-and-feel of our market reports changed as we added tons of information over these years, but the goal remained the same: to give MBS investors a fair picture of the TBA agency market and make it a starting point for their decisions.

We have recently accomplished a major step toward making the Market Analysis truly comprehensive: through integration with our most advanced OAS system 6.0 and prepay model family 5.1, and, because of the tremendous speed of the backward induction, we are able to cover many new important collateral types. In particular, the new report:

• Includes three 15-year agency collateral types (FNCI, FGCI, GNJO)

• Includes ten agency hybrid types with all types of resets and cap structures

• Shows prepay risk-neutrality in four tuning dimensions, refinancing, turnover, slide and burnout (so far, for the fixed-rate TBAs only)

The Active-Passive Decomposition (APD) prepay structure, which enables valuation via the backward induction, truly shows its power: we have tripled the size of the analysis in half of the time. In particular, hybrids have long been very desirable for many clients; as detailed in the July issue of the Pipeline.

>>>