The Pipeline

With mortgage spreads to 10-year Treasuries elevated for over a year now, we open with two articles related to mortgage spreads and current coupon, followed by an article on our new climate conditioned LDM (ccLDM).

As we all know, mortgage rates are high and significantly so when compared with the 10-Year Treasury rate (UST 10-Year). Since April of 2005, the primary market mortgage rate spread to the UST 10-Year has bulged to more than 100 basis points (bps) over its historical average of 182 bps as depicted in Figure 1. This spread, in turn, is being driven by the wide yield spread between the current coupon FNMA MBS and the UST 10-Year, which now lies 100 bps over its historical average of 83 bps for the same period.

Andrew Davidson & Co., Inc.’s (AD&Co) has recently expanded its historically interpolated current coupon MBS analytical results to include an additional 30 or so measures: projected life prepayments, effective duration/convexity, key rate durations, and many others. This expanded database allows us to present interesting findings about how these measures change over time, despite steady MBS “moneyness”. Factors like yield curve slope, volatility level, and prepayment model revisions contribute to these dynamics.

In recent articles, we have described Andrew Davidson & Co. Inc.’s (AD&Co) overall approach to incorporating climate risks into our analytical framework, and provided details on how our home-price appreciation (HPA) model will evolve within this framework. Our LoanDynamics Model (LDM) is the other main component that will account for climate risk: LDM handles the mortgage holder’s behavioral response to such risk by modifying the likelihood of prepaying or defaulting.