AD&Co. Update - November '06

Mortgage Market in a Glance
by Rob Landauer

The duration, relative value and optionality of the agency fixed and hybrid ARM market is eloquently summarized each week in our Market Analysis Report (http://www.ad-co.com/market_analysis.htm).

Each Monday, a new report containing the key OAS and static based results for all actively traded fixed rate coupons and hybrid loan types are posted to this site to provide a snapshot of spread and risk. Servicing, portfolio and risk managers can use these reports to quickly assess the appropriateness of their hedges, values and portfolio structure.

The Reports were recently enhanced to utilize prepayment speeds from our new v5.2a prepayment model for 10 different agency loan types (http://www.ad-co.com/newsletter/2006/Sep06/Update.htm). The hybrid loan types vary by time to initial reset (3, 5, 7, and 10 years), margin, as well as the initial, periodic and lifetime cap structure. Our analysis therefore lets analysts compared many MBS and ARM types in search of the best relative value.

All analytical results are generated using AD&Co’s full valuation system through a special version of our OAS Spreadsheet product. Assumptions include:

Term Structure Model - Hull-White
Valuation Methodology - Backward Induction for fixed rates and quasi-monte carlo for hybrids
Volatility - time dependent calibrated to 2 and 10 year swaption vols
Yield Curve - LIBOR/Swap
Current Coupon Rates

These assumptions are all clearly displayed at the top of each report. As a result, users can get an apples to apples comparison to results generated from their analytical platform. This comparison allows the user to assess the reasonableness of the outputs from any vendor or internal system that uses the AD&Co prepayment model. This evaluation is an important step in the validation of the proper integration of the AD&Co prepayment or valuation system into a third party system.