Welcome to The S-Curve
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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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Drivers of Discount PrepaymentsThoughts
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.
The charts below the rates of curtailment and payoffs in a sample of Fannie Mae loan level data[1].
Curtailments involve borrowers making additional payments beyond their amortization schedule yet short of paying off the full amount, i.e., people making an extra payment each month. In the charts we can see the rate rising slightly over time (which is mainly attributed to age; this data only has loans originated after Jan 1999, so the earlier months are limited to younger loans) and settling into a rate around 1.5-2.5 CPR. However, there was also a bit of a jump during the pandemic, which can perhaps be attributed to borrowers having extra cash from stimulus payments.
Full payoffs involve paying off a mortgage completely without moving or taking out a new mortgage, which tend to occur if borrowers find themselves with enough cash to cover the outstanding balance. While this can’t be known with 100% certainty, we’ve estimated the rate by looking at payoffs with a remaining term of 36 months of less. These are unlikely to be refinances and while we can’t rule out the possibility of the borrowers moving, we observe payoff rates loans with short remaining terms to be dramatically above the baseline turnover level. In essence, this chart shows the percentage of loans with short remaining terms (low) multiplied by their payoff rate (high) to get the overall contribution to CPR. Like curtailment, the data takes a while to ramp up, but then settles into 1-3 CPR range.
Both series represent a small percentage of prepayments in normal environments, but a greater percentage of the overall level in a world without refinancing. While it’s not a given that these numbers will remain constant in the face of rising rates, it is likely that these factors won’t have quite the same sensitivity to rates as refinancing (this study found payoffs to be relatively flat at negative incentive[1]). If rates stay high, it may be useful to keep these factors in mind moving forward.
[1] https://www.philadelphiafed.org/-/media/frbp/assets/working-papers/2019/wp19-39.pdf
[1] https://capitalmarkets.fanniemae.com/credit-risk-transfer/single-family-credit-risk-transfer/fannie-mae-single-family-loan-performance-data
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.