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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Real World Data on House Price Impact of Climate RisksThoughtsThe earliest paper we found examining the impact of climate risks on house prices was from 2017, which found a relationship between elevation/sea level rise and house price differences.[1]
We built our climate-conditioned HPA model in 2022 based on the idea that an increase in insurance costs would impact house prices (something we had not studied yet) in the same way that an increase of the same size in mortgage rates would impact house prices (something that we were quite familiar with).
The real world evidence for this relationship has been accumulating recently – on October 15, 2024 the Washington Post published an article entitled “Where climate change poses the most and least risk to American homeowners” which contains the following chart (which is based on an analysis of 2 million home sales in Florida since 2000):
We can see from the lines comparing lower and higher flood risk properties that until very recently, the housing market was not pricing for flood risk. But now there is a clear divergence in price trend.
For the particular case of Florida, there is reason to believe that this trend will strengthen in the near term: until recently, the only reason most people got flood insurance was that they were in a FEMA flood zone and they were required to buy a NFIP policy in order to obtain a mortgage. FEMA flood zone maps are known to be extremely outdated. However, with the accumulation of flooding incidents occurring outside those zones and the publishing of flood risk scores on Zillow, buyers are becoming much more aware of flood risk whether or not a property is in a FEMA zone.
Additionally, the state of Florida is gradually requiring all homeowners buying insurance through Citizens (its FAIR plan for homeowner’s insurance) to also have flood insurance regardless of flood zone status. This requirement started in 2024 for houses priced $600,000 and above, and by January 1, 2027, will extend to all properties insured by Citizens. At the end of 2023, Citizens was the largest insurer in Florida with 15% of all policies and over half a trillion dollars of insured properties.
Furthermore, the different post-event experiences of homeowners who have flood insurance versus those who didn’t is likely to encourage more homeowners – even those not taking a policy through Citizens – to add flood insurance to their property. So flood risk, at least in Florida, is getting closer to being fully priced into real estate values.
While the Washington Post article only discusses flood risk, all borrower costs matter to housing affordability – property taxes, homeowner’s and flood insurance, and the mortgage (leaving aside the psychological costs of nuisance events that don’t rise to the level of filing a claim). To truly capture the potential impact on both house prices and borrower behavior of all these rising costs, a fully climate conditioned approach, combining home prices as well as borrower behavior models (how will prepayment, delinquency, default and loss severity be affected?) is required. This is what our Climate Impact Suite offers.
[1] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3073842&itid=lk_inline_enhanced-template
The S-Curve Archives
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ProductsAndrew 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.
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ProductsAndrew 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.
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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.