Welcome to the Pipeline, Andrew Davidson & Co., Inc.‘s monthly newsletter,
a “pipeline” of relevant and useful information, focused on recent trends, changes
and advances in the mortgage investor’s market.
RISING INTO FALL
by Eknath Belbase
In the last month, the US Treasury curve has backed up about 20 bps in the belly and just over 15 bps at the 10-year point. This month marks the beginning of quantitative tightening (QT), the process by which the Federal Reserve begins to reduce its balance sheet holdings of Treasury and mortgage-backed securities (MBS).
The first article, by Harry Qin and myself, looks at the MBS portion of this portfolio. We examine the likely rates of portfolio reduction under two interest rate scenarios: What happens if rates stay roughly where they are versus if they slowly rise following implied forwards?
Our analysis shows that the first few years are very predictable with little interest rate sensitivity due to the time-varying caps set on the rate of principal reduction; later on, though there is some interest-rate sensitivity, principal repayments are likely to remain below caps, resulting in a fairly long reduction period—unless the Fed’s plans change down the road.
October has also been a busy month for AD&Co in terms of conferences. Conferences are one way in which we gain insight into larger trends affecting our industry, evolving client needs and potential new services we can add to meet these needs. Our second article, by Rose Barnabic from our Business Development team, shares some details about these conferences with our readers.
As always, we look forward to your comments.
AD&Co News
Even More Conference News…
We are pleased to announce that we are a sponsor of SFIG’s Residential Mortgage Finance Symposium 2017 on November 7-8 at The Conrad in New York City. Its stated goal is to explore the intersection of private capital and government-sponsored entities in the Residential Mortgage Market. We are also the sponsor of the Special CRT Track—a main focus of the second day. Check out the agenda here.
Look for our booth near the registration desk or contact Rose Barnabic, rose@ad-co.com to schedule a meeting. Stay tuned to the SFIG website for updates to the agenda.
Coming in November: AD&Co and PolyPaths Webinar
AD&Co and PolyPaths will be co-hosting a webinar to discuss the growing issuance of Agency commercial mortgage-backed securities (CMBS) and demonstrate how their prepayment and credit risks can be evaluated using AD&Co’s new Multifamily LoanDynamics Model (LDM) and the PolyPaths system.
Multifamily LDM forecasts monthly vectors of prepayment speeds that incorporate the call protection that separates multifamily collateral different from its residential counterpart. These vectors can then be used within the PolyPaths system for cash flow projections, bond pricing/valuation, and asset/liability management. Look for additional announcements and registration links in the coming weeks. Please contact support@ad-co.com if you are interested in trialing the model.
SLOW AND STEADY: A LOOK AT QUANTITATIVE TIGHTENING
by Eknath Belbase and Harry Lijia Qin
At its September meeting, the Federal Reserve announced that October would mark the beginning of its efforts to gradually unwind its portfolio of Treasury and mortgage-backed securities (MBS), which were purchased as part of post-crisis quantitative easing (QE) measures. In this article, we examine the MBS portion of this portfolio, which constitutes $1.8 trillion of the Fed’s $4.3 trillion in assets. Because of the nature of the caps (which are stated in terms of principal payments on MBS) and the sensitivity of principal payment to interest rate movements, we ran two interest-rate scenarios to develop a sense of how long it might take the MBS portfolio to fully return to private hands. At the end of the article, we will explore what this pace of quantitative tightening (QT) might mean for markets in general and fixed-income sectors in particular.
On October 2-3, 2017, IMN’s inaugural Mortgage Risk Management Strategies Conference brought together bank and non-bank mortgage originators and servicers, mortgage insurance providers, and investors. The event also attracted investors in less traditional mortgage assets.
AD&Co was well represented and contributed to several panel discussions: Eknath Belbase participated in a panel focused on tail risk. During that panel, un-modeled risks from hurricanes Harvey and Irma—particularly the impact on non-bank servicers—featured prominently and the subject of the Fed’s balance sheet and risks from its unwinding process were also discussed (see our related Pipeline article). Richard Cooperstein participated in panels on Credit Risk Transfer (CRT) and Mortgage Servicing Rights (MSR) Hedging. In the latter, Richard focused on the importance of understanding not only market-risk exposure, but also credit-risk exposure. He discussed the financial impact of missing Agency foreclosure timelines and the need for comprehensive analytics supported by a sound credit model.
Welcome to the Pipeline, Andrew Davidson & Co., Inc.‘s monthly newsletter,
a “pipeline” of relevant and useful information, focused on recent trends, changes
and advances in the mortgage investor’s market.
RISING INTO FALL
by Eknath Belbase
In the last month, the US Treasury curve has backed up about 20 bps in the belly and just over 15 bps at the 10-year point. This month marks the beginning of quantitative tightening (QT), the process by which the Federal Reserve begins to reduce its balance sheet holdings of Treasury and mortgage-backed securities (MBS).
The first article, by Harry Qin and myself, looks at the MBS portion of this portfolio. We examine the likely rates of portfolio reduction under two interest rate scenarios: What happens if rates stay roughly where they are versus if they slowly rise following implied forwards?
Our analysis shows that the first few years are very predictable with little interest rate sensitivity due to the time-varying caps set on the rate of principal reduction; later on, though there is some interest-rate sensitivity, principal repayments are likely to remain below caps, resulting in a fairly long reduction period—unless the Fed’s plans change down the road.
October has also been a busy month for AD&Co in terms of conferences. Conferences are one way in which we gain insight into larger trends affecting our industry, evolving client needs and potential new services we can add to meet these needs. Our second article, by Rose Barnabic from our Business Development team, shares some details about these conferences with our readers.
As always, we look forward to your comments.
AD&Co News
Even More Conference News…
We are pleased to announce that we are a sponsor of SFIG’s Residential Mortgage Finance Symposium 2017 on November 7-8 at The Conrad in New York City. Its stated goal is to explore the intersection of private capital and government-sponsored entities in the Residential Mortgage Market. We are also the sponsor of the Special CRT Track—a main focus of the second day. Check out the agenda here.
Look for our booth near the registration desk or contact Rose Barnabic, rose@ad-co.com to schedule a meeting. Stay tuned to the SFIG website for updates to the agenda.
Coming in November: AD&Co and PolyPaths Webinar
AD&Co and PolyPaths will be co-hosting a webinar to discuss the growing issuance of Agency commercial mortgage-backed securities (CMBS) and demonstrate how their prepayment and credit risks can be evaluated using AD&Co’s new Multifamily LoanDynamics Model (LDM) and the PolyPaths system.
Please login to view the full Pipeline article.Multifamily LDM forecasts monthly vectors of prepayment speeds that incorporate the call protection that separates multifamily collateral different from its residential counterpart. These vectors can then be used within the PolyPaths system for cash flow projections, bond pricing/valuation, and asset/liability management. Look for additional announcements and registration links in the coming weeks. Please contact support@ad-co.com if you are interested in trialing the model.
SLOW AND STEADY: A LOOK AT QUANTITATIVE TIGHTENING
by Eknath Belbase and Harry Lijia Qin
At its September meeting, the Federal Reserve announced that October would mark the beginning of its efforts to gradually unwind its portfolio of Treasury and mortgage-backed securities (MBS), which were purchased as part of post-crisis quantitative easing (QE) measures. In this article, we examine the MBS portion of this portfolio, which constitutes $1.8 trillion of the Fed’s $4.3 trillion in assets. Because of the nature of the caps (which are stated in terms of principal payments on MBS) and the sensitivity of principal payment to interest rate movements, we ran two interest-rate scenarios to develop a sense of how long it might take the MBS portfolio to fully return to private hands. At the end of the article, we will explore what this pace of quantitative tightening (QT) might mean for markets in general and fixed-income sectors in particular.
Please login to view the full Pipeline article.ON THE ROAD WITH ANDREW DAVIDSON & CO
by Rose Barnabic
On October 2-3, 2017, IMN’s inaugural Mortgage Risk Management Strategies Conference brought together bank and non-bank mortgage originators and servicers, mortgage insurance providers, and investors. The event also attracted investors in less traditional mortgage assets.
AD&Co was well represented and contributed to several panel discussions: Eknath Belbase participated in a panel focused on tail risk. During that panel, un-modeled risks from hurricanes Harvey and Irma—particularly the impact on non-bank servicers—featured prominently and the subject of the Fed’s balance sheet and risks from its unwinding process were also discussed (see our related Pipeline article). Richard Cooperstein participated in panels on Credit Risk Transfer (CRT) and Mortgage Servicing Rights (MSR) Hedging. In the latter, Richard focused on the importance of understanding not only market-risk exposure, but also credit-risk exposure. He discussed the financial impact of missing Agency foreclosure timelines and the need for comprehensive analytics supported by a sound credit model.
Please login to view the full Pipeline article.