The Pipeline

The back-up and steepening that began soon after the election accelerated recently, with an extremely volatile session on the 25th following a weak 7-year Treasury auction. The yield curve is now over 50 bps higher on the long end since the election. Further moves appear possible as growth prospects and improvement in the employment picture become clearer. Given the importance of employment numbers, it is particularly timely that we are in the process of releasing LDM 3.0.

This article introduces LoanDynamics Model (LDM) 3.0, a forthcoming update to AD&Co’s borrower behavior model. The updated model will focus specifically on the delinquency transition in the Agency LDM Plus model. In this brief article, we will highlight three key additions to that model:

• New Loan-Level Factors

• Delinquency History

• Unemployment

On February 12, the Federal Reserve Board (Fed) released two scenarios—Base and Severely Adverse—for the 2021 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.

Borrower behavior constantly evolves in response to changes in economic conditions, new product introductions by lenders, and development of new government policies. Ensuring that Andrew Davidson & Co., Inc.’s (AD&Co) models remain good predictors of consumer behavior requires constant testing and, when appropriate, timely modifications. Performance trigger reports help us identify model drift and developing trends in prepayments, delinquencies and defaults.