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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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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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.