The Pipeline

Much has changed since our last issue of The Pipeline. With the end of QE very near, the Fed is nearing the commencement of monetary tightening, and inflation rather than employment is now the dominant concern. Additionally, geopolitics has changed dramatically, in a way that magnifies uncertainty and opens up potentially stagflationary scenarios in the near and intermediate term.

Making credit assessment more accurate and fairer should be a core value for the mortgage market. While this alone would not fully address the wealth effects of 100 years of housing and mortgage discrimination, it is a necessary step for moving towards a fairer future.

On February 10, the Federal Reserve Board (Fed) released two scenarios—Base and Severely Adverse—for the 2022 Comprehensive Capital Analysis and Review (CCAR). These scenarios describe three-year trajectories based on key economic indicators—of the 28 variables, the ones used by AD&Co’s mortgage models are home price (CoreLogic national HPI); interest rates (3-month, 5-year, and 10-year Treasury, prime index, and mortgage primary rate); and national unemployment.

As part of a larger initiative underway at Andrew Davidson & Co., Inc. (AD&Co) to incorporate the impacts of climate change risks into several of our models and economic analyses, we use inputs from risQ (now part of Intercontinental Exchange, Inc. and hereinafter referred to as ICE) on underinsured flood risk for the state of Florida. Assuming a fair hike in insurance premium, we convert it into a change in the economic cost of borrowing and home price outlook. In search of economic consequences for our industry, we focus on loan guarantees: premium rate and economic capital.