The S-Curve

Welcome to The S-Curve

Now you will be able to receive the latest announcements, product updates, and our insights on the mortgage market in real time.

The name of the blog, the S-Curve, is a reflection of our logo and the central feature of our prepayment model. S-curves are seen in nature in many phenomenon, from population growth to prepayment and default models. Our first S-curve, in the early 1990s, used the arctangent function, then piece-wise linear functions, and evolved over time to be more complex and vary by FICO, loan size and LTV. This evolution encapsulates both the timeless nature of fundamental relationships and constant innovation to describe them better over time.

We hope you find the information useful and we look forward to your feedback.

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Blog - Latest
  • Agenda for Completing GSE Reform

    Andrew Davidson, Richard Cooperstein


    The January 14, 2021 revisions of the Preferred Stock Purchase Agreements between the Treasury and the GSEs[i] (Government Sponsored Enterprises) along with the Treasury Department Blueprint on Next Steps for GSE[ii] Reform perhaps represent the end of a decade- long effort to create multiple competitive enterprises and end the government support of the GSEs. Instead, it may be possible to advance reform of the GSEs as systemically important utilities with government backing, as described coincidentally on the same day in a webinar presented by the National Association of Realtors, with Richard Cooperstein of Andrew Davidson & Co., Inc.  as one of the presenters.

    We have argued that there is no stable outcome for multiple competitive GSEs.[iii]  The issues of too big to fail and the central role of the GSEs in the housing finance system cannot be resolved by having more guarantors, rather the GSEs should be transitioned into publicly owned utilities with the backing of the federal government for their MBS and other essential activities. Competition in the primary market for loan origination and in the capital markets for MBS and credit risk transfer yields the desired outcome of keeping mortgage rates affordable and widely available, provided that the GSEs are appropriately regulated as utilities. 

    The Treasury Department Blueprint includes steps that are essential for creating a future for the GSEs outside of conservatorship.  Included in these steps, is the need to “establish appropriate pricing oversight” and “set a commitment fee for ongoing government support.”  Recognizing the need for these two components in a reform package provides the necessary basis to create a sustainable future for the GSE and the housing finance system. 

    Treasury further recognizes that it may not be possible to achieve a competitive equilibrium stating: “Even with FHFA chartering authority, additional entrants may not be forthcoming.” Thus, hopefully spelling the end of the competitive GSE effort.

    While these are welcome messages from the current Treasury Department, FHFA over the past few years has pursued a different agenda based on the assumption, despite contrary evidence, that the mortgage secondary market is an inherently a stable competitive market and requires no federal intervention to function fairly and efficiently. FHFA rule making has been focused on enhancing competition, perhaps by chartering new guarantors, and removal of all government support for the enterprises.  (FHFA seems to avoid the term GSE.) 

    Recent FHFA actions will hobble attempts to restructure the regulation of the GSEs as systemically important public utilities with appropriate federal backing. Moreover, the excessive capital requirement, that is insensitive to risk, in the recently adopted capital rule and the draconian requirements of the proposed “rapid and orderly resolution” documents, would make it difficult for the GSEs to continue their role in the mortgage market and raise private capital to protect taxpayers from credit losses during periods of economic stress. The capital rule and the proposed rule on resolution will need to be withdrawn and reproposed to move ahead with GSE reform.[iv]

    With the arrival of the Biden administration, there is the opportunity to complete GSE reform over the next few years by taking advantage of the growing consensus on the mission and operation of the GSEs as government-backed utilities. While the GSEs have operated successfully under conservatorship, there are unaddressed stresses from inconsistent policies across administrations and the lack of legislative resolution. We present an agenda for completing reform in three steps which is largely consistent with the Treasury Blueprint.

    First: Reaffirm the mission of the GSEs and that they are systemically important utilities:

    As stated in law, GSEs primary role is to provide stable financing to all capable borrowers in all markets, and to the extent consistent with stability distribute housing finance risks to the market.

    Standardization of lending and servicing practices promotes liquidity, stability and fairness and must also foster equality of access to housing finance to overcome historical biases in lending.

    Public missions cannot be fulfilled by maximizing profits, rather, it requires utilities that accomplish their mission subject to threshold market returns.  Thus, the GSEs should be treated as such from mission, risk, capital, and guarantee-fee perspectives. 

    Second: Recognize the necessity of a government backstop to achieving the GSE mission.

    History repeatedly demonstrates that stability requires a federal guarantee and insurance against extreme risks in housing market.

    GSE Capital rule should be suspended and re-proposed to be consistent with role of GSEs as distributor of housing finance risk with government support in time of severe financial stress with obligations toward providing broad access to housing finance.

    PSPA should be restructured to allow for capital accumulation within the GSEs with a risk-based commitment fee replacing the earnings sweep.

    As with publicly held regulated utilities, the Federal guarantee creates a funding efficiency advantage that should be used to reduce mortgage costs for conforming borrowers and to promote equity in housing for financially disadvantaged borrowers and communities.

    Third: Establish a pathway to resolution

    In Conservatorship, FHFA and Treasury should regulate the companies in a way that is consistent with their role as market utilities and increase the flexibility of GSE management to achieve their Congressionally mandated mission as enforced by FHFA under a utility regulatory framework.

    FHFA and Treasury should draft legislation transforming the GSEs into shareholder owned utilities with rate-of-return and mission-based guarantee fee regulation.  We do not believe that it is necessary to merge the two GSEs as there may be significant benefits to maintaining two entities that compete on service but not on credit or price.

    Government support for the GSEs should be made explicit through insurance for catastrophic loss for the GSEs and a full faith and credit guaranty for the MBS and perhaps some amount of debt issued by the GSEs for specific purposes such as the cash window and repurchases of delinquent loans.

    FHFA and Treasury should develop a plan to resolve outstanding common and preferred share claims and begin the process of raising private equity, perhaps through issuance of convertible preferred, that becomes equity upon the achievement of a set of milestones.

    Broader reforms of the Housing Finance System

    In addition to addressing the pressing need to advance GSE reform and firmly establish the GSEs as utilities, there are other aspects of the housing finance system that must be improved to address the potential disruptions from COVID as well as the long-term stability and effectiveness of the housing finance system.

    Reforming federal mortgage securities servicing to align compensation to costs will reduce the financing risk of servicing non-performing loans that greatly strained the non-bank servicing market during the pandemic. COVID related forbearance (as well as other natural disaster and economic disruption) still poses a threat to the stability of the mortgage finance system.

    Creating a standards-setting organization for the entire mortgage market that levels the playing field for all originators/investors with standards based on ability to repay for each borrower.  This will improve access to credit for underserved borrowers and communities by reducing cost and enhancing liquidity for mortgages that are not eligible for GSE purchase.

    Facilitating the use of expanded credit data beyond credit scores in making lending determinations to expand access to responsible mortgages for a wider swath of the American public.

    Modernizing banking capital rules to allow for reductions in capital requirements for credit risk transfer and other transactions that reduce risk on bank balance sheets.

    These reforms require coordinated action between all the federal agencies and entities involved in housing finance including Treasury, HUD, FHFA, CFPB, OCC, FDIC and the Federal Reserve. Consequently, the administration should establish a central office at Treasury or the NEC to focus on housing finance policy and coordination to address short-term needs as well as fundamental structural issues.

    With the end of the focus on creating competitive GSEs without government support, the main conceptual roadblocks to GSE reform are now gone.  Of course, there are many details to be worked out and resolution of the status of such a significant part of the economy will be difficult, but the road to that goal is now clearer than ever.


    [iv] The letter agreements of January 14, 2021 include the bizarre provision that Fannie Mae and Freddie Mac “shall comply with the Enterprise Regulatory Capital Framework disregarding any subsequent amendment or other modification to that rule.”


Blog - Archives

The S-Curve Archives

  • Andrew Davidson, Richard Cooperstein


    The January 14, 2021 revisions of the Preferred Stock Purchase Agreements between the Treasury and the GSEs[i] (Government Sponsored Enterprises) along with the Treasury Department Blueprint on Next Steps for GSE[ii] Reform perhaps represent the end of a decade- long effort to create multiple competitive enterprises and end the government support of the GSEs.

  • News
    Martin Luther King, Jr. was a great leader and inspirational speaker. His wisdom can serve as a guide for as long as we remember him. Andrew Davidson & Co would like to acknowledge a fraction of what he gave us with two relevant quotes that seem fitting in 2021.
  • Thoughts

    In the spring of 2019, National Association of Realtors® (NAR), together with financial-market experts Susan Wachter (Wharton) and Richard Cooperstein (Andrew Davidson & Co., Inc.)  proposed completing the transition of Fannie Mae and Freddie Mac (Enterprises) into market utilities in a publication entitled “A Vision for Enduring Housing Finance Reform.” This work builds on Richard Cooperstein and Andrew Davidson’s 2017 paper

  • News

    We proudly launched our new website on November 13th. As you familiarize yourself with the new look of, you will come to know the many new offerings we provide. Along with the new website, we have organized our products as a menu of models and applications for a wide range of investor appetites. Let us review the menu of our product offerings.

  • Tom Parrent


    Separating signal from noise is at the heart of what we do at AD&Co. One of the key tools we utilize for that purpose is a sophisticated set of model performance trigger reports. These monthly reports not only alert us to model drift but also point to possible causes for the drift.

  • News

    Andrew Davidson & Co., Inc. (AD&Co), is proud to support Fite Analytics’ innovative cloud-native Mortgage-Backed Securities Analytics Service. The Fite Analytics solution incorporates AD&Co’s LoanDynamics models that provide forecasts of voluntary prepayments, defaults and losses that drive risk analytics across the mortgage-backed securities market with comprehensive coverage.

  • News

    We are thrilled to announce that Andrew Davidson & Co., Inc. has launched a new look for Some of the exciting new features of this site include:

    • A dynamic homepage highlighting the firm’s latest innovations, AD&Co client benefits, announcements, and Diversity, Equity and Inclusion efforts.