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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Insights on Updating GSE Credit Score PolicyThoughtsFHFA held a listening session for interested parties on its proposed rule on the GSE process for credit scores. The objective is making mortgage underwriting and pricing more accurate and more fair while balancing practical implementation by firms in the mortgage ecosystem. Along with many others, I had the opportunity to provide insights on this proposed rulemaking.
Insights
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The mortgage credit score market is better served by 2 providers rather than 1, or 10. Other consumer credit markets have had two major providers for years and the main reason only one score is used for mortgages is regulatory restriction. Why two? The credit score market has core characteristics of a regulated utility. Providers are commercial enterprises that have barriers to entry and large externalities; negative if run poorly, positive if run well, and large information asymmetries. Their mission is profitable but not profit maximizing. Two regulated actors provide innovation and service to market while limiting confusion or destructive competition.
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Credit providers set the rules for which score, not the credit requesters. There is concern that with a choice of credit scores, originators will pick off the GSEs. This is a false concern since FNMA (soon FRE) hasn’t used credit scores for years. As a major investor in credit risk, FNMA uses core consumer data and doesn’t rely on third party metrics. Estimates are that a dual score model could cost $500 M over three years. Since several thousand originators in other markets already use two scores this seems unlikely. Even if true, this amounts to 1 basis point on mortgage origination volume over this time.
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Important consumer data is not included in classic credit scores today, and some may never be because they’re not credit data, such as Trended Data, Telecom Utility data, and rental data. Regulators should ensure that all card companies report Trended Data. Even if it’s possible to combine into one score, it may not benefit consumers to have an even broader opaque metric of their financial lives controlled by private companies.
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It’s likely that expanding consumer financial data in mortgage underwriting and pricing will benefit first-time buyers and under-banked populations that have been historically discriminated. Since digital availability is widespread, transition expenses should not be a reason to avoid improving lending fairness.
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The data necessary to build a quantitative bridge from old scores based on limited data to new scores based on expanded data should eventually be generally available so the broader market can make their own risk decisions as well as the GSEs (MIs, servicers, investors, researchers, etc.).
It’s clear that important consumer credit data is available outside classic credit scores and that perhaps should not be embedded into single consumer credit metrics. This extra data is quite likely to benefit first time homebuyers and underserved populations. Finally, it’s quite likely that this highly regulated, private market will provide larger benefits to consumers with two actors rather than one, or ten.
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The S-Curve Archives
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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.
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ProductsThe release of Andrew Davidson & Co., Inc.’s (AD&Co) new generation of financial engineering tools marks a shift to a new reality; when the traditional benchmark for MBS valuation, the LIBOR/ Swap yield curve, becomes unavailable. Our recent Product Release email informed our readers about the change. In short, our users can:
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ThoughtsFHFA held a listening session for interested parties on its proposed rule on the GSE process for credit scores. The objective is making mortgage underwriting and pricing more accurate and more fair while balancing practical implementation by firms in the mortgage ecosystem. Along with many others, I had the opportunity to provide insights on this proposed rulemaking.
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ThoughtsIn our January 19th blog entitled, A More Equitable Lending System Will Not Be Created by Accident, we described the efforts it will take to overcome not just bias in lending today, but the systemic factors that have limited access to credit in the past and have created an unjust system.
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ThoughtsIn this short blog post I discuss some developments taking place in the flood insurance landscape in the US and look ahead at a few potential directions things could go. I suggest that universal catastrophic flood insurance coverage with a continuation of the introduction of risk-based pricing would be a significant improvement.
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ThoughtsIntroduction
The Government-Sponsored Enterprises (GSEs) entered conservatorship in September 2008. One could view the succeeding thirteen years as a journey back to financial stability with a refined operating model that looks more like a financial utility than a hedge fund. This business model is more compatible with a fair lending mission for a standard-setter that maintains secondary markets under an effective regulator. The GSEs remain the largest part of the housing finance backbone and a resilient funding source during economic stress.
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Thoughts
Around 75% of white American families were homeowners in the first quarter of 2020, according to data from the United States Census Bureau. However, only 44% of Black American families owned their homes at the same time.
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Thoughts
According to a report by the Research Institute for Housing America, climate change risk is rapidly increasing in the housing industry and will continue to demand more attention and regulation in the near future.
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Thoughts
Mortgage market participants are keenly aware that the Federal Reserve has been scaling back its UST and MBS purchases and factoring the outcomes of its actions on stakeholders across markets.