Consulting Corner
Modeling Mortgage Risk: Definitional Issues
By Kyle G. Lundstedt, Ph.D.
1. Introduction
In the February issue of The Pipeline, we provided a general overview of the issues involved in loan level modeling of both major components of mortgage risk – prepayment and default. We discussed the non-agency mortgage market and outlined a brief history of the analytical frameworks used to capture these risks, including competing risks hazard models.
In this issue of The Pipeline, we begin our discussion of the AD&Co methodology for loan level modeling of mortgage risk by starting with some important definitional issues. In order to successfully build models of mortgage risk that capture prepayment, delinquency and default behavior, we must decide upon common, generally accepted definitions for each of these behaviors. This article discusses the two standards for measuring mortgage delinquency. We then offer up two definitions of default, based upon various levels of delinquency. Finally, we discuss the implications that our default definitions have for a loan-level definition of prepayment. Read more...
Valuation Commentary
What is Behind OAS Measures?
By Alex Levin
While skimming the Divide and Conquer trilogy someone asked me: “You don’t like the OAS, do you?” The answer is, yes, we do like OAS and generally view it as an application of the option pricing theory. Our idea to replace the OAS measure with prOAS is a proposal not to rely solely on statistical prepayment models and to reflect their potential biases as well as market fears using so-called risk-neutral prepayments instead. Once this is done, the OAS methodology applies. Let us revisit the OAS concept, and provide its comprehensive power.
Defining the OAS rigorously
“OAS is a spread added to random discount rates generated by Monte-Carlo paths to equate averaged present value of contingent cash flows to true market price…” — does such a definition look familiar? It can be found in many textbooks and articles on MBS valuation, but sounds like a mathematical artifact having no economic meaning or financial consequence. What about usual callable bonds that are priced with OAS but without random simulations? Read more...
Model Performance Review
Model Performance
By Dan Szakallas
Prepayments rose sharply in March, as expected. Low rates during the March refinance window coupled with the seasonal rise in home sales caused speeds to jump significantly. FNMA 30-year prepayments for 5.0’s, 5.5’s, and 6.0’s rose by 41%, 39%, and 32%, respectively; the largest increase seen in a long time. FNMA 15-year prepayments also posted large increases from February, moving by 36% and 31% for 4.5’s and 5.0’s, respectively. Large jumps were also seen in the GNMA sector, especially in the 4.5 coupon bucket, which increased by 36% from February. The coupon range of 4.5 to 5.5 continued to remain noticeably faster than the FNMA counterparts. Actual pool CPR speeds of selected coupon buckets along with corresponding model forecasts are shown Read more...
AD&Co. Update
Puzzled By Today's Market? Don't Be.
By Ilda Pozhegu
This June we can help you piece it all together at our 13th Annual Client Conference, The Mortgage Market Mosaic: Tools and Techniques to See the Big Picture.
And that picture is SO big that we have to span the country to show to you. We invite you to come join us in New York on Thursday, June 2 nd or in San Francisco on Tuesday, June 7 th as we address how to amalgamate a seemingly segmented industry. Topics will range from exposés on our models and methodologies to discussions on how these products converge into real-world applications for valuation and growth opportunities. In addition, guest speakers will talk about challenges they’ve recently tackled in the fixed income arena.
Our past events have earned praise for being useful, informative and hosted in remarkable settings. Word spread and the demand for an additional locale has us in San Francisco this year as well as New York. Don’t miss out on the chance to be a part of this highly anticipated annual gathering.
Two locations, one big picture.
Registration is free and simple. Just click here to sign up or contact Laura Silberg for details at 212-274-9075.
See you in June!
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