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Value Commentary
As discussed in the Model Performance Review, our analysts have determined that setting the burnout tuning parameter to 1.1 for 30-year agency and government MBS will yield a more accurate prepayment forecast. In this column, we will discuss how this change will affect valuation.
Setting the burnout tuning factor to a value higher than 1.0 reduces the effect of burnout, causing in-the-money pools to prepay rapidly for a longer time. This has the effect of reducing OAS on all instruments, but premiums are affected much more than discounts.
Tables 1 through 3, below, show the OAS and Equivalent PSAs of MBS
with coupons between 5 and 8 for Fannie Mae, Freddie Mac, and Ginnie
Mae, respectively, with both the old and new value for burnout tuning.
With the burnout tuning parameter set at 1.0, the OAS curve is very
steep, with a much higher OAS on the highest coupons. Setting the burnout
tuning to 1.1 speeds up prepayment speeds across the board, but has
the most impact on the highest coupons. This speed-up in prepayments
brings the OAS on higher coupons down, giving them a valuation that
is much closer to that of the lower coupons.
|
FNMA 30
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|
Burnout 1.0
|
Burnout 1.1
|
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|
Coupon
|
Price
|
OAS
|
Equiv. PSA
|
OAS
|
Equiv. PSA
|
|
5.0
|
99.50
|
41.97
|
299.00
|
40.40
|
304.67
|
|
5.5
|
101.94
|
38.01
|
414.72
|
35.33
|
431.73
|
|
6.0
|
103.81
|
22.95
|
744.86
|
16.09
|
835.71
|
|
6.5
|
104.50
|
39.14
|
812.79
|
23.18
|
952.10
|
|
7.0
|
105.53
|
62.88
|
751.06
|
33.46
|
906.25
|
|
7.5
|
106.63
|
104.56
|
608.76
|
62.64
|
758.16
|
|
8.0
|
108.13
|
120.49
|
553.68
|
63.13
|
705.92
|
