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.
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Ability-To-Repay Benchmark UpdateThoughts
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. This update shows that the cohorts continue to perform consistently.
To review; the metric is 60+ DQ (delinquency) rates at 24 months old for loans guaranteed by GSEs, FHA, VA, and non-QM securitizations. We update performance through late 2021 or early 2022 depending on the data source. The update turned out to be six to nine months past the peak non- performance rates (60+ DQ + Forbearance) of the pandemic. One of the best tests of reliability are cohorts that perform consistently at significant turning points. We show two different examples of cohort performance which all pass with flying colors.
Figure 1 extends the original time-series delinquency graph by cohort across combined federal segments (GSE, FHA, VA) and shows consistent performance through the two sharp turning points in delinquencies from the lows before the pandemic and the peak thereafter.
Figure 1. Delinquency Rates by Cohort
Figure 2 extends the time-series graph that compares the ‘FHA Average’ cohort for each of the three federal segments, GSE, VA, FHA, and non-QM. The ‘FHA Average’ cohort is roughly 95 LTV, 680 FICO, 40 DTI for government lending, and about 90 LTV, 680 FICO for non-QM. The results continue to illustrate that the benchmark cohorts perform consistently across market segments.
Figure 2. Delinquency Rates for ‘FHA Average’
Conclusion
The pandemic and the federal response to it are unprecedented in modern times for their impact on the US economy and housing market. Nevertheless, mortgage cohorts performed consistently over the last several years across federal and non-QM segments, increasing confidence in this approach. This stability contrasts with the vastly higher non-performance rates of the subprime and reduced documentation era that resulted from poor lending practices, as we reported in the original study.
This highlights that conscientiously measuring income is essential to consistency.
The S-Curve Archives
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ThoughtsWe’re excited to announce our latest Quantitative Perspectives providing in-depth insights into current market trends and advanced valuation techniques. This publication offers valuable information for mortgage market participants and those involved in credit risk transfer transactions.
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PodcastTune in to Laura Silberg's interview with Andrew Davidson, Eknath Belbase and Alex Levin as they discuss their latest Quantitative Perspectives, our independent commentary series, titled
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ThoughtsAs providers of mortgage models for financial institutions, Andrew Davidson & Co., Inc. (AD&Co) enables clients to validate their use of our models and offers documentation describing the conceptual framework of the models, back-testing results, and sample forecasts under a variety of economic conditions. We also work with analytics providers who have incorporated our models to ensure that the models works as intended.
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ThoughtsWe’re excited to announce two new Quantitative Perspectives that provide in-depth insights into current market trends and advanced valuation techniques. These papers offer valuable information for mortgage market participants and those involved in credit risk transfer transactions.
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EventsAndrew Davidson & Co. Inc. (AD&Co) proudly sponsored the Information Management Network (IMN)’s 10th Annual Mortgage Servicing Rights (MSR) Forum, held November 21 - 22, 2024 at the New York Marriott at Brooklyn Bridge.
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Podcast
Tune in to Michelle Stepien Breier's interview with Alex Levin & Matteo Caracciolo-King as they discuss their latest Pipeline article “AD&Co Updates its Home Price Index Model.” The interview highlights key points from the article as they share recent updates to the HPI3 model.
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ThoughtsWith the increasing volumes of Synthetic Risk Transfer (SRT) and Credit Risk Transfer (CRT) along with the discussion of BASEL III, we thought it would be useful to re-issue our comment letter to FHFA on the capital treatment of Credit Risk Transfer.
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PodcastRecently, senior credit modeler, Daniel Swanson had the pleasure of speaking with Rob Kessel from the Panoramic Capital Academy podcast titled, “Modeler’s Perspective on Prepayment Modeling.” T
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ThoughtsThe 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).
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NewsAndrew Davidson & Co., Inc (AD&Co) is pleased to announce a new alliance with Mortgage Capital Trading, Inc. (MCT), a leading provider of mortgage capital market solutions.