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.

Subscribe to our publications to make sure you stay up to date
Blog - Latest
  • Federal Home Loan Bank of San Francisco's Innovations in Mortgage Finance Symposium

    Richard Cooperstein

    Events

    The Federal Home Loan Bank of San Francisco directed the Urban Institute to develop innovative and actionable ideas to close the gap between white and black homeownership rates, which is as wide today as before the Fair Housing Act, enacted 60 years ago. Homeownership is crucial to a fairer society because working and middle-class families most commonly create inter-generational wealth by owning homes with amortizing mortgages. Urban Institute’s eighteen-month effort culminated in a symposium in February in Los Angeles attended by dozens of housing experts. The Borrowers Mutual Escrow Fund (BMEF), which I developed a few years ago, was included in the Urban Institute study, and I was invited to discuss it at the symposium.

    A few key themes emerged from the symposium. One centers around replacing decades-old credit scores with modern metrics that better reflect borrower financial condition as the consumer financial footprint has become increasingly digitized, especially among minority populations. These metrics generally extend beyond traditional credit profiles to include other important measures of borrower financial condition such as digitized cash flow data, telecom/utility data and others. A fair amount of evidence already shows that modernized metrics assess homeownership readiness much better than old ones. Reducing uncertainty reduces cost.

    Another theme that includes the BMEF, is that when trying to expand homeownership, liquidity and cash flow stability can be more critical to the success of marginal borrowers than traditional credit scores and down payments. Conscientious borrowers generally strive to restart paying their mortgages after short delinquencies if given the chance. Empirical support for this view includes delinquency performance through repeated climate events (e.g., hurricanes and floods) and the success of generalized forbearance during the COVID-19 pandemic.

    This has turned decades of loss mitigation wisdom on its head. The Massachusetts state mortgage insurance program has included unemployment benefits for almost 20 years to resounding success. This program provides borrowers with fragile liquidity and volatile income, with a few months of payment reserves between jobs (e.g., consistently succeeds in preventing delinquency even through the financial crisis of 2007 and the COVID-19 pandemic). The GSEs and FHA have now made forbearance their initial loss mitigation response to borrower delinquency.

    The BMEF proposes that borrowers put 3% of their house value into an administered escrow account instead of towards a down payment. It’s well-known that reserves are crucial to borrower success and placing reserves into escrow to be used for income interruption or unexpected maintenance will make reserves even more effective. Money in such accounts will always reduce risk compared with small down payments for borrowers, servicers, mortgage insurers and guarantors. This is provably true because the escrow funds are very liquid for payments, while the liquidity value of small down payments is effectively zero. Further evidence is that reperformance rates for delinquent borrowers are higher for borrowers with lower credit scores than for those with higher credit scores.

    Borrowers pay mortgage insurance and guarantee fees to compensate insurers for risk, but it does not impact borrower ability to pay. By contrast, putting aside borrower funds for financial stress reduces risk throughout the value chain. Since it is borrower money in the first place, no subsidy is needed, but risk declines because liquidity is improved. Finally, borrower escrows managed by servicers for taxes and insurance are individual. However, BMEF escrows can be combined across borrowers to generate large diversification gains. Even among traditionally risky borrowers, perhaps 75% of them will never become delinquent, so it’s likely that the benefit limit can exceed the average contribution.

Blog - Archives

The S-Curve Archives

  • Richard Cooperstein

    Events

    The Federal Home Loan Bank of San Francisco directed the Urban Institute to develop innovative and actionable ideas to close the gap between white and black homeownership rates, which is as wide today as before the Fair Housing Act, enacted 60 years ago. Homeownership is crucial to a fairer society because working and middle-class families most commonly create inter-generational wealth by owning homes with amortizing mortgages.

  • Richard Cooperstein

    Events

    The Data Foundation of Mortgage Finance

    Homeownership is the largest source of wealth accumulation and inter-generational wealth transfer for the working and middle class. However, the non-interest cost of financing is always an obstacle for first-time and low-wealth buyers, and underserved populations.

  • Vivian Li

    Thoughts

    In this blog post, we used the recently updated Mortgage Market Statistical Annual to examine the dynamics of residential loan origination by state and by market segments and highlight important trends.

  • Eric Limjoco

    Products

    Andrew Davidson & Co., Inc. (AD&Co) is pleased to announce the official release of Kinetics v1.10, the latest update to AD&Co’s modular platform for running the AD&Co suite of analytics. This update introduces the Multifamily LoanDynamics Module, the newest way to run Multifamily LoanDynamics Model (LDM). Investors, servicers, insurers and lenders can leverage this new module to better understand the prepayment and credit risk of their multifamily mortgage portfolio.

  • Mickey Storms

    Events

    Andrew Davidson & Co., Inc. (AD&Co) held a webinar on June 8th entitled “Lessons Learned: Insights for Managing the Interest Rate Risk of Banks.” Mickey Storms from our Alliances and Policies team, Alex Levin from our Financial Engineering team and Andrew Davidson were featured speakers.

  • Hikmet Senay

    Products

    Andrew Davidson & Co., Inc (AD&Co) is pleased to announce the beta release of a new monthly report series titled “Specified Pool Prepayment Trends,” which aims at showing market prepayment trends for specified agency pools in support of pay-up analyses by investors, traders, and alike.

  • Michelle Stepien Breier

    Products

    Andrew Davidson & Co., Inc (AD&Co) is pleased to announce that Polypaths LLC supports AD&Co’s Auto LoanDynamics Model (Auto LDM) providing prepayments, defaults and losses on auto loans and securities.

  • Richard Cooperstein

    Events

    The Structured Finance Association hosted SFVegas 2023 (February 26 - March 1), a broad capital markets conference with thousands of attendees in Las Vegas.  Andrew Davidson & Co. Inc. (AD&Co) was a sponsor focused on the mortgage sector.  As we engaged with clients and policy leaders, a few themes emerged: Data, Expanding Access Safely, Ginnie Mae Servicing and Auto Loan Performance.

  • Eric Limjoco

    Products

    Andrew Davidson & Co., Inc (AD&Co) is pleased to announce the official release of the LoanDynamics Module in Kinetics, AD&Co's new modular platform for running AD&Co analytics via a desktop application, web browser, or REST API. The LoanDynamics Module is the latest way to run the LoanDynamics Model, allowing users to perform sensitivity analysis, validation testing, and scenario analysis in a modern, user-friendly application.

  • Sanjeeban Chatterjee

    Thoughts

    Recently the Federal Housing Finance Agency (FHFA) announced some upcoming changes related to the use of new credit scores, FICO 10T and VantageScore 4.0 by Fannie Mae and Freddie Mac. “FHFA expects that implementation of FICO 10T and VantageScore 4.0 will be a multiyear effort. Once implemented, lenders will be required to deliver both FICO 10T and VantageScore 4.0 credit scores with each loan sold to the Enterprises”.[1] This announcement will impact the entire mortgage ecosystem.