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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The Signal and The NoiseThoughts
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.
In the mortgage market, changes in behavior on the part of both borrowers and lenders may create gaps between model projections and actual performance. Early analysis of these gaps provides rich information to our modelers based on which they can either identify temporary drifts in model performance or, more importantly, highlight fundamental changes in behavior that need to be captured in our models.
Every product type is monitored along the following four dimensions, with residuals defined as the monthly difference between projected and actual results:
Moving average: Are residuals deteriorating over time?
Trend: Are residuals consistently becoming more positive or negative?
Bias: Is the model persistently overpredicting or underpredicting actuals?
Magnitude: Are model misses large enough to matter?
Multiple types of triggers are useful for determining the seriousness of a breach as well as the type of adjustments that might be warranted in response. For example, a moving average warning might indicate a developing change in borrower behavior that may require either additional explanatory variables or more complex functions of existing variables to tighten the residuals. Alternatively, updated data may provide key information for refitting the model. A small but persistent bias, on the other hand, may be easily corrected with a simple tuning parameter adjustment.
These triggers also help us monitor performance at the factor level. Rather than simply observing, for example, how GNMA 15-year MBS are performing, we have triggers at different levels of credit score, LTV, note rate, and many other factors. This deep analysis, presented as an easy-to-use dashboard, quickly identifies possible causes of model drift.
In January, we will present a detailed review of our trigger methodology, and show how we use the reports to help set our modeling priorities in order to explain performance and, when necessary, modify our models to accommodate new behavioral patterns. For now, we will leave you with the following example of a segment of a trigger report for FHLMC MBS using LDM 2.2 with COVID tunings applied.
Happy Holidays!
Tom Parrent, Model Risk Management
October 2020 FHLMC Trigger Report
Trigger Type Bias Magnitude MovAvg Trend LoanType UPB FHLMC_30YR 2,085,272,108,356 ⬤ ⬤ ⬤ ⬤ Trigger Type Bias Magnitude MovAvg Trend LoanType Net Coupon UPB FHLMC_30YR 2.0 196,050,740,636 ⬤ ⬤ ⬤ ⬤ 2.5 253,743,515,938 ⬤ ⬤ ⬤ ⬤ 3.0 547,254,721,052 ⬤ ⬤ ⬤ ⬤ 3.5 498,363,756,722 ⬤ ⬤ ⬤ ⬤ 4.0 331,086,483,224 ⬤ ⬤ ⬤ ⬤ 4.5 152,994,012,086 ⬤ ⬤ ⬤ ⬤ 5.0 59,076,412,520 ⬤ ⬤ ⬤ ⬤ Legend Pass ⬤ Watch ⬤ Warning ⬤ -
Andrew Davidson & Co., Inc.’s LoanDynamics Models Empowers Fite Analytics’ MBS Analytics ServiceNews
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. To read the full press release click here.
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Introducing the New AD&Co WebsiteNews
We are thrilled to announce that Andrew Davidson & Co., Inc. has launched a new look for ad-co.com. Some of the exciting new features of this site include:
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A dynamic homepage highlighting the firm’s latest innovations, AD&Co client benefits, announcements, and Diversity, Equity and Inclusion efforts.
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Our new blog titled The S-Curve that offers our latest announcements, product updates, and insights on the mortgage market in real time.
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An enhanced solutions-focused structure organized by I Work In (includes industry and investment categories), Tools (product pages), Consulting, Insights (announcements and literature), and Client Portal (downloads portal and model resources).
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About AD&Co includes Our Company and Diversity, Equity, and Inclusion sections which offer a look into the firm’s foundation, culture, and practices.
Please take the time to:
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Register to access the new website. You will be prompted to set up a new password.
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Kindly verify your contact information on your User Dashboard. If you need to update your information, please contact us.
Finally, we’ve updated our Terms of Use and Privacy Statement. You will be asked to accept them when you log in for the first time.
Please let us know feedback or concerns to ensure we continue to serve you well. Thank you.
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The S-Curve Archives
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EventsThe 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.
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ProductsAndrew 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.
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ThoughtsRecently 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.
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ThoughtsJanuary is National Mentoring Month which is very appropriate since it coincides with the time when we typically set out our goals and intentions for the New Year. Organizations are embracing mentoring programs and these programs have indeed become a strategic imperative for many. There are many benefits to mentorship and it's easy enough to comprehend. The individuals involved in a mentoring relationship and the organizations that choose to sponsor a mentoring program all are likely to benefit.
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ThoughtsHomeownership is the largest source of wealth accumulation and inter-generational wealth transfer for the working and middle class. However, the history of racial discrimination (it was actually legal to discriminate by race in housing until the Fair Housing Act of 1968), suggests that we have a continuing responsibility to ensure fair access to housing and housing finance.
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ThoughtsDear 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.
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ThoughtsFor many people, having accessible transportation (a car, for example) is necessary. Most U.S. people live in areas without adequate public transportation and require vehicles to access jobs, healthcare, and groceries.
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Thoughts
As interest rates rise and fewer loans with refinancing incentive remain, other factors are primed to play a larger role in determining prepayment speeds in the coming months (and perhaps years). Turnover, the rate at which people move, is the most cited of these factors. In this blog post, we’ll consider two other potential drivers: curtailments, or partial prepayments, and mortgage payoffs that don’t involve taking out a new loan.
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Thoughts
Summary
In 2021, Andrew Davidson & Co. Inc. (AD&Co) proposed a benchmark cohort approach to setting Ability-to-Repay (ATR) Qualified Mortgages (QM) standards. Successful benchmarks based on data are model-free and transparent, and the cohorts must perform consistently in comparison to one another and across time. Our original work used data through the early stages of the pandemic when non-performing loan percentages skyrocketed.
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ThoughtsHow Lowering Capital Costs Affects Higher-Risk Loans
Government-sponsored enterprises (or GSEs) are companies that provide guarantees and financing to originators through the mortgage secondary market. The size and resilience of the GSE secondary market maximizes diversification and liquidity which reduces financial risk and cost of capital. This benefit accrues to conforming borrowers through lower mortgage rates and resiliently available financing.