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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FRED Adds AD&Co’s GSE-and-Borrower-Option-Adjusted Spreads for CRT IndicesNewsAD&Co US Mortgage High Yield Indices
The Federal Reserve Economic Data (FRED) portal, housed by the Federal Reserve Bank of St. Louis, has been publishing AD&Co’s CRT indices since 2019. These series posted under the overall name of “US Mortgage High-Yield” include total return rates and credit and option-adjusted spreads (crOAS) – a projected return’s spread over Treasury (in the past, Libor). These series are available going back to 2014-end and tiered by CRT initial supports.
Tier 0 includes all CRTs with under-25 bps support; Tier 1 bonds have supports exceeding 25 bps, but not 95 bps; Tier 2 has support from 95 bps to 175 bps; Tier 3 – from 175 bps to 375 bps, and, finally, Tier 4 – above 375 bps. The actual bond’s name (As, Ms, or Bs) that matches each tier can vary over time and between Fannie Mae’s CAS and Freddie Mac’s STACR transactions. We define Mid-Tier as the aggregation of Tiers 1 through 3. A CRT to be included in an index must have a factor of 0.25 or higher.
While actual rates of investment return are computed model-free, crOAS levels come from the AD&Co model. Importantly, the crOAS indices that date back to 2014 do not account for the GSE call option embedded in a CRT and therefore overstate the expected return. See, for example, index CROASMIDTIER for Mid-Tier or index CROASTIER0 for Tier 0; the latter currently shows crOAS of about 600 bps.
What is New?
Over the last couple of years, AD&Co developed a model to account for embedded GSE calls. Most CRTs are now issued with a five-year call and a cleanup call. Exercised in the interest of the GSEs, those options reduce investor return. Our December 2024 Quantitative Perspectives[1] laid out the theoretical foundation of our methods. A subsequent September 2025 Pipeline article[2] listed results of the production analysis across the entire CRT cash market.
We have been using the new method in our CRT Monitor monthly publication for the last several months. We have also started sending the new series to FRED, which has adopted it with an announcement. The new crOAS series goes back only to June 30, 2025, and is reported by the same tiers as the previously computed ones. To indicate the difference in the series, the new series contains “GSE and Borrower Options-Adjusted Spread” in the names. A screenshot of FRED’s onboarding, showing all the indices together, is seen below.
Source: FRED As expected, the more protected CRTs are priced at tighter, more realistic, crOAS levels. They never reach many hundreds of basis points when the GSE option is accounted for.
[1] A. Levin and N. Salwen, Valuation of Credit Risk Transfer with Embedded Calls, Quantitative Perspectives, Dec 2024.
[2] A. Levin, Comparative Valuation of CRTs with and without Embedded GSE Calls, Pipeline 191, Sep 2025.
The S-Curve Archives
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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.
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Thoughts
The growing prevalence of artificial intelligence in the mortgage industry is shining a new light on the human biases that have pervaded the industry since its inception. AI is meant to bring fairness and objectivity to mortgage decisions, but it can’t perform fairly if it was built on an unfair system.
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Products
The LDM v3.0.2 library adds AutoLDM to the v3.0.1 library.
Key benefits include:
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EventsWe at Andrew Davidson & Co., Inc. (AD&Co) are once again thrilled to celebrate Pride Month, especially the contributions of LGBTQ professionals in the field of finance including affordable housing policy and the GSEs. This year, in addition to celebrating, we are also paying increased attention to the challenges that LGBTQ individuals face, particularly around issues of housing. Our pride in our LGBTQ staff and community sits alongside our concern about discriminatory lending practices, including in mortgages. As of February 2021, for the first time, lesbian, gay, bisexual, transgender, queer, and questioning (LGBTQ) Americans will be protected from housing discrimination under the Fair Housing Act.
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News
For several years, AD&Co has tracked the total rate of return (TRR) performance of the GSE CAS and STACR CRT in its U.S. Mortgage High-Yield Indices. The AD&Co Mid-Tier index constitutes a broad market measure of the TRR performance of GSE CRT. The related sub-indices segregate the CRT market into 4 index Tiers by attachment point, reflective of the credit exposure of the various classes of underlying CRT ranging from B to M1.
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EventsWe at Andrew Davidson & Co., Inc. (AD&Co) stand in solidarity with the Asian community and speak out against the xenophobic ignorance that has led to increased racist attacks against Asians. We protest against these hate crimes. This is a time to celebrate the richness that we have gained from the diversity of the Asian culture. We pledge to support the heritage that is part of what makes us American.
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Events
What does it mean to be mentally healthy? The answer is different for everyone. With all the extra anxiety that many of us have experienced since 2020, whether from uncertainty about COVID-19 or from other experiences that may be new to us, it’s important to acknowledge that it’s alright to not feel alright. Fortunately, there are numerous resources that are available locally, nationally, and in some cases through your workplace or benefits package. We might start by finding out what makes us feel better.