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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The GSEs as Regulated UtilitiesThoughts
In the spring of 2019, National Association of Realtors® (NAR), together with financial-market experts Susan Wachter (Wharton) and Richard Cooperstein (Andrew Davidson & Co., Inc.) proposed completing the transition of Fannie Mae and Freddie Mac (Enterprises) into market utilities in a publication entitled “A Vision for Enduring Housing Finance Reform.” This work builds on Richard Cooperstein and Andrew Davidson’s 2017 paper, “ Is There a Competitive Equilibrium for the GSEs?”
In NAR’s latest white paper, “GSEs: Their Viability as Public Utilities,” Wachter and Cooperstein expand on several points in their earlier discussion. On January 14, 2021 at 1:30 PM ET, NAR is hosting a webinar open to all interested parties to further explore and discuss these insights.
Why a Utility?
Fannie and Freddie were established by Congress as private companies with a public mission; namely, to support secondary market liquidity and mortgage access at all times, across the entire country, with a special obligation to support underserved markets. The mortgage origination and capital investment markets are highly competitive and efficient, but the guarantor and securitization markets are not. These markets function better with externally imposed standards for quality, consistency, capital adequacy and fairness. Further, scale is required to achieve these goals. These are the characteristics of public utilities.
The common governance structure for utilities is private companies with service obligations and strong regulators that ensure adherence to the mission and to regulate returns. The cost of capital is by far the largest component of the GSE risk fee, so reducing the unsubsidized cost of debt and equity is the most effective way to reduce consumer cost and advance homeownership. Financial theory and 100 years of empirical evidence show that government-granted franchises that operate in limited markets have lower return volatility and thus lower required returns on equity and debt. Indeed, the beta for utility stocks is half that of the S&P 500.
Three requirements for success are: (1) The GSEs curate stable debt markets for interest rate and credit risk and to intermediate most of their risk into these competitive capital markets. (2) A federal backstop on pass-through debt (MBS) and corporate financing for approved activities such as Cash Window operations and non-performing loan buyouts, but not for equity holders or credit risk securities. And (3) A governance structure that balances the tension between regulation, mission and capital markets discipline with a regulator, board, shareholders and management. At this stage, the regulator and operating model are largely in place, it remains to establish a Board that represents shareholders and other constituents, and shareholders.
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.