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
  • Andrew Davidson & Co, Inc. (AD&Co) Turns 30: What’s the Definition of an Industry Pioneer?

    Andrew Davidson


    Dear Friends,

    As Andrew Davidson & Co., Inc. (AD&Co) reaches its 30-year milestone, I reflect on two seemingly contradictory ideas:  Firms need experience to guide clients through difficult times but sometimes it is necessary to discard past practices to achieve breakthroughs. 

    As a 30-year-old firm with many of employees having worked at the company more than ten years and several well past the twenty-year point, we feel confident that as individuals and as a firm, we have experienced a wide range of market conditions and a variety of obstacles. This level of experience is valuable when there are market disruptions, providing us with perspective on risks and opportunities. The rapidly rising rates within the last few months, mirror the rate increases of the early 1990s. 

    The sub-prime meltdown in 2007 was one of many historical cases where declines in underwriting quality ended poorly. Of course, each event is unique. The 1994 rise in interest rates shook the markets as new derivative products, in particular inverse floaters, caused significant disruptions.  And the 2007 subprime crisis had far greater effects on the overall economy than the previous failed underwriting episodes. Neither “this time is different” nor “history repeats itself” are entirely true.

    While we are proud of our company history and experience, does that mean that in 1992, the then new Andrew Davidson & Co lacked experience and hence was an unreliable partner?  I would like to think that we have provided valuable advice and insights to our clients from the start.  In fact, some might say that people learn too much from the past, and particularly from their mistakes.  A new firm may be willing to buck tradition and find a new and better way.  As a new firm we brought approaches and techniques to the investment community that were still not widely accepted.  Ideas including the use of option-adjusted spread valuation, demystifying inverse floaters and showing the risk of many types of CMO structures.  In fact, we had a newsletter with Tom Ho’s GAT that focused largely on debunking the claims of marketers of dubious bonds.

    Which then is better? To be the new disrupter or the voice of experience?  Perhaps both.  Perhaps neither.  

    I believe the key to the longevity and success of this company has been to find the right blend of historical knowledge and testable conceptual frameworks.  Even as an upstart firm in 1992, we used decades of mortgage data to develop our models. We were also students of the history of the mortgage market: from the birth of the Home Owners’ Loan Corporation (HOLC) in the aftermath of the Great Depression (including the sad history of redlining); to the rise of FNMA, GNMA and securitization, the first CMO in 1983, and the Secondary Mortgage Market Enhancement Act (SMMEA) in 1984. It was the Federal Housing Enterprises Financial Safety and Soundness Act, adopted in 1992 that set the groundwork for the rapid expansion of the GSEs and contributed to the 2007 housing finance meltdown.  The study of these events helps us to understand the role of the government in both causing and addressing inequality in housing finance as well as the role of the government in promoting and interfering with liquidity in the secondary market.

    We recognize that experience is essential to understanding markets, but you don’t need to live through an event to understand it.  The study of history and historical data is an essential component of analyzing the mortgage market. As interest rates rise, mortgage analysts would be well advised to learn about the late 1970s and early 1980s to see how the market performed when most loans were discounts, and into the refinancing booms of 1986 and 1987 to understand how rapidly the market was transformed by refinancing; the latter period had payment rates that greatly exceed those we observed in the recent refinancing waves.

    On the other hand, data alone does not always produce good analysis. In 1992, a much of the mortgage market possessed the same data we did. However, many market participants were mired in outdated ideas that did not reflect the realities of the market. Our goal has always been to combine data with financial theory. We develop models of the behavior of financial products and look to data to validate or force a reconsideration of those ideas. When a model doesn’t work as expected, that’s not the time to deny the data, but rather to look to refine or revise your thinking. In that way, we are always ready to update (or disrupt) the prior way of thinking when the evidence supports new approaches and new ideas.

    We may not anticipate every change in the market, but we have a disciplined approach to keep up to date.  The number of times that we have provided advice that was not taken and then led to significant losses or firm failures is distressingly high: Pipeline managers that failed to hedge interest rate and/or basis risk; insurers who managed “through the cycle” without understanding how capital markets can disintermediate them; portfolio managers who hedged duration, but not funding risk.  On the other hand, the number of firms we have helped navigate difficult times provides reassurance that we have been on the right track. We have convinced some firms to give up the yield of support bonds, hedge risk even if it reduces income, issue credit sensitive bonds (such as CRT) to reduce their concentrated risk, or alternatively buy credit sensitive bonds to diversify. Throughout the past 30 years, our models have provided hundreds of firms with the tools they need to measure and manage uncertainty.

    I believe our combination of historical and conceptual perspectives is what makes our company unique and why we have stood the test of time.

    We are currently applying our dual approach of historical information and conceptual frameworks to new areas of mortgage modeling. We are incorporating additional credit data such as trended data (revolver vs. transactor), utility data, and rental data into our models. Determining which data is truly additive and how to utilize data with short histories into the models requires a combination of statistical tools and modeler judgement to place the new variables into our credit framework. 

    We are also linking climate data to forecast models. To date there has been limited impact of climate stress on mortgage losses, but climate events have had a significant impact on delinquencies and forbearance practices and could have significant impact on borrower behavior and loan valuation in the future. Just as with new credit variables, predicting the future impact of climate stress requires the use of both historical data and conceptual frameworks to identify the potential pathways for climate impact.

    We are extending our modeling to auto loans and other consumer receivables, extending the breadth of our expertise. And we are evaluating a variety of machine learning and artificial intelligence techniques, mindful of the need to make sure that these tools are not used merely to fit data, but also enhance our understanding of the underlying dynamics of borrower behavior. Even if some of the new techniques are currently inadequate to the task at hand, they provide insight into how to build models that can dynamically adapt to new data.

    History and concepts are only parts of the story. Our teams and our collective dedication to our clients and industry are also essential ingredients in making the company what it is today. Our values have not changed in these 30 years: Value and respect all stakeholders, conduct ourselves with integrity and impartiality, and create opportunities for personal and professional growth while maximizing flexibility to experience life’s joys and face life’s obstacles. On this last point, we pioneered many employee benefits that are now coming into vogue: no dress code, no set work hours, no tracking of vacation days, time off for personal needs, paid sabbaticals, fee-only advisory for retirement accounts. Our business dealings with alliance partners and clients must always benefit both parties. Open and honest relationships are the source of financial success in the long run.

    I would like to thank each of you for the support and encouragement you have provided to us over the years. We look forward to many more years of successful engagements as the future is transformed into the growing corpus of historical data and new ideas and financial concepts emerge from our mutual experiences.

    Andy Davidson Signature
    Andy Davidson

    •    At Andrew Davidson & Co our mission is to serve as a trusted, independent, expert in the mortgage and adjacent markets and to leverage our knowledge base in service of our clients and our industry.
    •    We use our research and expertise to create valuable tools and solutions and offer them broadly through direct relationships with clients and in conjunction with other firms. 
    •    We create opportunities for personal and professional growth while maximizing flexibility to experience life’s joys and face life’s obstacles. 
    •    We value humanity, inclusivity, dedication, citizenship, creativity, and integrity. 
    •    We manage our resources to achieve financial stability and long-term viability. 

Blog - Archives

The S-Curve Archives

  • Andrew Davidson


    Around 75% of white American families were homeowners in the first quarter of 2020, according to data from the United States Census Bureau. However, only 44% of Black American families owned their homes at the same time.

  • Eknath Belbase


    According to a report by the Research Institute for Housing America, climate change risk is rapidly increasing in the housing industry and will continue to demand more attention and regulation in the near future.

  • Mickey Storms, Richard Cooperstein


    Mortgage market participants are keenly aware that the Federal Reserve has been scaling back its UST and MBS purchases and factoring the outcomes of its actions on stakeholders across markets.

  • Andrew Davidson


    The growing prevalence of artificial intelligence in the mortgage industry is shining a new light on the human biases that have pervaded the industry since its inception. AI is meant to bring fairness and objectivity to mortgage decisions, but it can’t perform fairly if it was built on an unfair system.

  • Products

    The LDM v3.0.2 library adds AutoLDM to the v3.0.1 library.

    Key benefits include:

  • Events
    We at Andrew Davidson & Co., Inc. (AD&Co) are once again thrilled to celebrate Pride Month, especially the contributions of LGBTQ professionals in the field of finance including affordable housing policy and the GSEs. This year, in addition to celebrating, we are also paying increased attention to the challenges that LGBTQ individuals face, particularly around issues of housing. Our pride in our LGBTQ staff and community sits alongside our concern about discriminatory lending practices, including in mortgages. As of February 2021, for the first time, lesbian, gay, bisexual, transgender, queer, and questioning (LGBTQ) Americans will be protected from housing discrimination under the Fair Housing Act. 
  • News

    For several years, AD&Co has tracked the total rate of return (TRR) performance of the GSE CAS and STACR CRT in its U.S. Mortgage High-Yield Indices. The AD&Co Mid-Tier index constitutes a broad market measure of the TRR performance of GSE CRT. The related sub-indices segregate the CRT market into 4 index Tiers by attachment point, reflective of the credit exposure of the various classes of underlying CRT ranging from B to M1.

  • Events
    We at Andrew Davidson & Co., Inc. (AD&Co) stand in solidarity with the Asian community and speak out against the xenophobic ignorance that has led to increased racist attacks against Asians. We protest against these hate crimes. This is a time to celebrate the richness that we have gained from the diversity of the Asian culture. We pledge to support the heritage that is part of what makes us American. 
  • Events

    What does it mean to be mentally healthy? The answer is different for everyone. With all the extra anxiety that many of us have experienced since 2020, whether from uncertainty about COVID-19 or from other experiences that may be new to us, it’s important to acknowledge that it’s alright to not feel alright. Fortunately, there are numerous resources that are available locally, nationally, and in some cases through your workplace or benefits package. We might start by finding out what makes us feel better.

  • Products

    Today marks the publication of Chris Widman's Quantitative Perspective, a comprehensive article on the newest member of our LoanDynamics suite, the Auto LoanDynamics Model. Auto LDM will be integrated into vendor systems and AD&Co tools, allowing users to perform analysis on auto loan and ABS positions.