LoanDynamics™ Model: After a very successful product launch at the 2007 American Securitization Forum Conference in January in Las Vegas, the model continues to meet with an enthusiastic reception from a wide swath of market participants. Hedge funds, mortgage insurers, broker dealers, government entities and large consumer banks have put the model through its paces and found it to be a viable tool to manage the delinquency, default and loss risk associated with non-agency residential mortgage loans. The evolution of the model continues, with our current work aimed at the incorporation of a broader data set to calibrate the transition coefficients, the coverage of additional loan types, data entry tools, and tuning capabilities. Keep tuned to this column for further updates on the new market standard in managing credit risk—the LoanDynamics™ Model.

Prepayment Models: The v5.2 generation of the prepayment model was released in the 4 th quarter of 2006. To refresh your memory, this version provides access to our new suite of ARM and Hybrid models for all agency and non-agency collateral. To learn more about this release, please visit (http://www.ad-co.com/support/user/version_release_schedule.htm). We are pleased to announce that several of our key vendor partners; Polypaths, Derivative Solutions, Intex, ZM Financial, RiskSpan and Tillinghast have all completed the integration of this version intro their systems. In addition, v5.2 can be used through QRM through the use of a XML file. For more information or to request a trial, please contact your account manager, Laura or Suzanne.

In a final note, it is with mixed emotions that I announce that Ilda Jacobsen has left AD&Co to relocate to California. While Ilda’s tremendous contributions to our firm over the seven years she worked with us will be missed, we all wish Ilda the best in her new digs on the west coast. Please contact Rob Landauer for any Ilda related business going forward.

Whether practitioners use our analytics to delta-hedge, to report hedge effectiveness under FAS-133, or to compute hedge ratios when taking short TBA positions against a pipeline origination, they focus foremost on a single analytical outcome - Effective Duration (ASA option-adjusted duration, OAD). Most requests for analytical consulting and most questions concerning valuation results also revolve around the reasonableness of this measure.

Much like most of our clients, we pay thorough attention to the OAD derived by our models. We have our own elaborated in-house OAS system that is heavily employed in the AD&Co business regimen as well as some client environments. This OAS system is used to generate our weekly market analysis reports. Last, but not least, it helps in benchmarking the valuation work done by our diverse clientele. Let me postpone my arguments and jump right to the conclusion: AD&Co analytics, when used properly, allows modeling the OAD for various MBS instruments accurately and inline with the market. This “proper” usage involves not only bug-free settings, but also a deep understanding of the limitations and extensions of the OAS method. Click here to read the full article.

Prepayments continued to decline in February as expected. The combination of the seasonal slow down and the short month resulted in drops across the coupon stack for both FNMA and FHLMC 30-yr pools. We saw a balance weighted average decrease of 11.0% for FNMA’s and 9.5% for FHLMC’s. The decrease for FNMA and FHLMC 15-yr collateral was not as drastic, at a balance weighted average of 5.7% and 2.3%, respectively. Looking at GNMA’s, we saw a balance weighted decrease of only 1.8% for 15-yr collateral, and only 1.3% for 30-yr collateral. In the FHLMC hybrid ARMs data, we observed balance weighted drops between 5%-11% in Libor and Treasury indexed 5/1’s, 7/1’s, and 10/1’s (all during their initial reset period), while 3/1’s posted an increase of about 10%. Click here to read the full article.