New
Tuning Recommendations
by Dan Szakallas
Prepayments showed small increases for low coupons and cuspy premiums in the month of October. The FNMA 15 and 30-years showed small declines in higher premiums, exhibiting the effects of burnout. GNMA's increased almost across the board, as only the GNMA 15-year 7.5's posted a slight decrease of 5.7% from September. New recommended tunings to v433k for the conventional 15 year prepayment models are discussed below. The table shows actual pool CPR speeds of selected coupon buckets, along with corresponding model forecasts.
|
|
FNMA
15
|
FNMA
30
|
GNMA
15
|
GNMA
30
|
||||
|
Coupon
|
Actual
|
Model
|
Actual
|
Model
|
Actual
|
Model
|
Actual
|
Model
|
|
4.5
|
8.6%
|
15.7%
|
7.1%
|
3.0%
|
11.3%
|
3.1%
|
11.2%
|
3.3%
|
|
5.0
|
13.0%
|
26.3%
|
10.7%
|
7.6%
|
13.5%
|
10.1%
|
15.5%
|
7.9%
|
|
5.5
|
20.2%
|
27.4%
|
18.0%
|
20.6%
|
20.1%
|
19.2%
|
21.6%
|
17.1%
|
|
6.0
|
23.3%
|
26.7%
|
28.4%
|
33.5%
|
23.0%
|
21.8%
|
29.0%
|
29.8%
|
|
6.5
|
23.2%
|
27.3%
|
33.6%
|
39.8%
|
24.3%
|
23.4%
|
38.0%
|
36.7%
|
|
7.0
|
24.9%
|
30.1%
|
36.0%
|
43.3%
|
23.5%
|
23.2%
|
41.1%
|
38.9%
|
|
7.5
|
23.5%
|
32.3%
|
37.1%
|
43.6%
|
23.3%
|
23.0%
|
40.7%
|
39.3%
|
The Andrew Davidson & Co., Inc. Prepayment Model v4.3.3k was slightly slower than the actual prepayment speeds for the GNMA pools, and slightly faster than actuals for the FNMA pools. Across collateral types, the model was off by a balance-weighted average of -3.2 CPR for the GNMA 30-year pools, and a balance-weighted average of -3.5 CPR for the GNMA 15's. The FNMA 30-year model was fast by a balance-weighted average of 2.0 CPR across coupons, the top performing model this month. The FNMA 15-year model continues to perform below expectations.
Reviewing model performance over the last 6 months, we have concluded that specific tuning can definitely improve fit. Without tuning, the model is fast by an average of 8.8 CPR across the coupons in the table above. By changing the slide parameter to .91, and the turnover parameter to 1.4, the overall error actually becomes 0 CPR. You can see the impact of these changes by going to http://dynamic.ad-co.com and entering these tuning values on any of the analysis pages.
Mortgage rates slipped a bit lower in October, and have seen a roughly 35 basis point drop (on monthly averages) since July. However, prepayments have remained relatively stable over this time period, largely due to burnout and the seasonality effect that peaked in August. From September to October, prepayments on the coupons above rose by an average of 5.3% for FNMC 30-year pools. The MTGENFCL index on Bloomberg hit a low in the last week of October, so perhaps we will see some of this effect in the November prepayment numbers as loans refinanced at that time will be finished processing.
Last month we debuted the new version of the prepayment model, V5.1- the Enhanced Pool Level Prepayment Model, and in this issue we continue to track the performance of that model. For actual pool CPR speeds of selected coupon buckets and corresponding model forecasts, please refer to the table below.
|
|
FNMA
15
|
FNMA
30
|
GNMA
15
|
GNMA
30
|
||||
|
Coupon
|
Actual
|
Model
|
Actual
|
Model
|
Actual
|
Model
|
Actual
|
Model
|
|
4.5
|
8.6%
|
8.6%
|
7.1%
|
6.7%
|
11.3%
|
10.8%
|
11.2%
|
9.0%
|
|
5.0
|
13.0%
|
17.6%
|
10.7%
|
9.6%
|
13.5%
|
15.8%
|
15.5%
|
13.1%
|
|
5.5
|
20.2%
|
26.3%
|
18.0%
|
17.5%
|
20.1%
|
19.9%
|
21.6%
|
21.5%
|
|
6.0
|
23.3%
|
34.3%
|
28.4%
|
32.9%
|
23.0%
|
25.8%
|
29.0%
|
29.8%
|
|
6.5
|
23.2%
|
35.7%
|
33.6%
|
43.4%
|
24.3%
|
26.2%
|
38.0%
|
42.8%
|
|
7.0
|
24.9%
|
33.9%
|
36.0%
|
44.0%
|
23.5%
|
26.1%
|
41.1%
|
45.0%
|
|
7.5
|
23.5%
|
31.5%
|
37.1%
|
42.5%
|
23.3%
|
26.2%
|
40.7%
|
42.2%
|
The v5.1 Enhanced Pool Level Prepayment Model performed well across all collateral types. Looking at the different pools, the model was off by a balance-weighted average of 4.2 CPR for the FNMA 15 pools, and a balance-weighted average of 1.7 CPR for the FNMA 30's. The GNMA models were also accurate, as the 15-year model was slightly fast by a balance-weighted average of 1.3 CPR, and the 30-yr model was also slightly fast by a balance-weighted average of 0.7 CPR across coupons. The model performs very well across the different collateral types, and enhancements are still being made to this model to improve fit. Contact Rob Landauer for more information on how to obtain a trial of this model in its current form.