Several AD&Co employees attended SFVegas 2025. This post shares their unique perspectives from attending the conference and key takeaways from the sessions.

Panel on Climate Risk & Property Valuation (Eknath Belbase)

We started with a discussion of physical and transition risks and how they are related to climate change and quickly moved into how these risks may impact property values and mortgage markets. This portion of the discussion focused on the availability and price of insurance, its potential impact on property valuation and borrower behavior, what is starting to be observed in the data and how this data may evolve in the next couple of years.

The final third of our time was spent on efforts to model these behaviors and the potential for originators and others with access to property and loan-level data to incorporate forward-looking climate risk models into their pricing and risk management decisions. A natural question was how those downstream without access to this personally identifiable information (PII) could model securities with this embedded risk, the potential for market disruption given this informational asymmetry and ideas to get around this issue (how to supply climate risk information to security investors without compromising borrower privacy protections).

Tech Odyssey: PoolKinetics (Laura Silberg)

Rob and I were pleased to have the opportunity to present AD&Co’s PoolKinetics from AD&Co’s latest Kinetics product line during the Tech Odyssey session in the Exhibition Hall at SFVegas.

Employing AD&Co’s LoanDynamics Model, OAS Subroutine and MacroDynamics Models for interest rates, home prices, and unemployment, PoolKinetics is designed to price and analyze the pay-up of specified pools relative to TBAs. Users provide pool characteristics such as loan size, LTV, geography, and credit score, which are critical inputs to model prepayment protection embedded in specified pools.

While AD&Co models are also available through many of our third-party vendor platforms, PoolKinetics is a complete front-to-back-end solution that is robust, flexible, and scalable. It can be integrated using a REST API into internal systems, with user-management and analyses-sharing across teams and a customizable web and desktop user interface.

Contact us to take PoolKinetics for a test drive or for more information.

First Time at SFVegas (Aidan Loftus)

This was my first experience at SFVegas and first conference with AD&Co. Having only been with AD&Co for around 15 months, I was anxious but still thrilled to be able to attend such a highly renowned financial conference. Despite getting lost on my way to the exhibit hall, I finally found the booth and received a warm welcome from my AD&Co teammates, and I knew I would be just fine.

Over the next few days, I was able to interact with some of our current clients and prospects. Every conversation was warm, friendly, and full of enthusiasm for AD&Co and the model solutions that we offer. It was great to finally put a face to some of our vendor partners that I have worked with over the past year. Likewise, it was terrific to network and meet new faces, while learning about their companies’ different products and solutions. The sessions I attended were informative, and I always walked away having learned something significant. A session on EU Securitization and Regulation piqued my interest, as I had very little knowledge of the subject matter. It was insightful to hear the discussion and compare it to the current effort in the United States and GSE reform.

Through all of this, I was able to catch up with my AD&Co team members, and have meaningful conversations about lives, work, and my first experience being at this conference. It was truly great to build camaraderie, and I was so happy that I was able to attend my first-ever conference with the AD&Co team.

A Theme of Uncertainty (Joni Baker)

This was my first time attending SFVegas, and I thoroughly enjoyed the energy, comradery, learning experiences, and market overviews that were shared. In addition to panels on topics such as Student Loan ABS, Agency MBS, and the effect of climate risk on property valuation, I also attended a fascinating talk by Sean Carroll on the Origins of Complexity in the Universe, in which he discussed complexity, entropy, and the surprising ways in which they are related and evolve over time. The Plenary: Macroeconomic & Geopolitical Outlook and Macro-Political Plenary sessions were both highly interesting but more immediate and sobering than the eventual fizzling out of our universe. The general sentiment was that the U.S. economy currently has a lot of uncertainty (“the word of the year”). Still, while panelists’ views generally varied on the details, I didn’t hear anyone who thought that 2025 would be a boom period. Growth will not come from house prices (since house prices are already high), labor force growth (due to immigration restrictions), the public sector (state and local cuts are likely to follow the Federal cuts), or consumers who already have cost fatigue before feeling the effect of any tariffs enacted.

Meanwhile, several deadlines are coming up regarding government funding (now delayed to later in 2025), the debt ceiling, and the expiring 2017 tax cuts. One panelist pointed out that Congress seems to be taking things day by day, with no master plan. It was hypothesized that ultimately, they will end up spending more and adding to the deficit, since this is the “path of least resistance” for fulfilling campaign promises.

Some speakers, seeing Biden’s tenure as a time of government overreach, seemed generally in favor of lifting some regulations to ease business, but not via the current haphazard “deregulation by layoffs” being effected by the Department of Government Efficiency (DOGE). Finally, another source of uncertainty is whether the GSEs will leave conservatorship, a complicated endeavor that must be done in a way that preserves the value and liquidity of MBS. I appreciated the overview and insights offered by the panelists at SFVegas, but at the same time, it was a welcome relief to return to the exhibit hall, engage with other conference attendees, and watch the Jenga game of the century taking place at the booth across from ours. I’m looking forward to my next SFVegas!

Now an SFA Veteran (Sam Sutton)

This year marks my very first experience at SFVegas and my first conference while being a part of AD&Co. Some initial feelings included being immensely lost between the vastness of the conference setting and the uniformity of suits surrounding me. However, much of this felt alleviated after finding my team and fully taking in the scope of this conference. The relief brings me back full circle from when I started my journey at the firm. I had my worries and doubts about being able to fit in as a Computer Science major and having zero background in Economics or Structured Finance. In a little over two years, however, my time at AD&Co has reminded me that we do not conform to the norm or status quo when it comes to how we show up.

I thoroughly enjoyed representing AD&Co, almost to the point of pride when realizing SFVegas is such a grand stage with numerous big players recognizing our name and work. Some of my notable interactions included one of the founders of Risk Span, as well as a Chief Strategist for Bloomberg Intelligence. This provided me with a very expansive view of clients and stakeholders to network with, as this has become very scarce in my professional life as of late. The hot topic this year revolved around GSE reform and the potential outcomes of privatization via the current Presidential administration. Hearing one of our very own (Richard Cooperstein) share their thoughts on how these entities representing public utilities should be used in favor of the greater public good versus the private good, it felt reassuring that I share a commitment to this industry with like-minded individuals.

Additionally, I had the pleasure of attending a few sessions on the prominence and implementation of AI in Structured Finance spaces. Mary Purk of Wharton was one of the speakers and single-handedly shifted my perception of AI to a more positive outlook (as it was mentioned in this talk that AI could be viewed either as “A component, or a competitor”). I am happy that I found the chance to learn, network, and participate in team building that reiterates why my experience at AD&Co continues to be irreplaceable. I look forward to joining the fun for another year!

Panel on MBS and Client Meetings (Richard Cooperstein)

I spoke on a panel of experts about the market for Mortgage-Backed Securities. Rather than focus on the technicals and risks of the MBS market, we spent more time on the public discussions of privatizing the GSEs. The general view was that the confidence, efficiency and liquidity of the MBS (GSE and GNMA) markets were all extremely high. Any plan to privatize these “financial market utilities” must be extremely careful not to undermine global confidence in the federal backstop or any of the methods that make the UMBS so liquid and tradable.

A theme of our discussions was the availability of new data that can improve risk and value assessments of mortgage-related assets. These data assets include property-specific climate data and expanded and improved consumer credit data. We hope to explore ways to bring these data and enhanced models into the mainstream of the mortgage ecosystem.

We’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.

Climate-Conditioned LoanDynamics Model (ccLDM) 

Eknath Belbase introduces the integration of climate risk into our analytical framework. Building on previous work, he explores how our LoanDynamics Model (LDM) has evolved to account for climate-related factors, adjusting prepayment and default probabilities. Climate-conditioned versions of LDM and House Price Appreciation (HPA) model are now integrated into our LoanKinetics (LK) tool and OAS subroutine, available for use. This paper focuses on the advancements in our prepayment, default, and severity models to better capture climate risk. Click below to read the full paper.

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This paper will be a valuable resource for your work. A login is required for access. If you have any questions or would like to discuss the content in more detail, please contact support@ad-co.com.

Tune 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 Is the New "New Normal" the Old Normal? Understanding Mortgage Rates.

In this discussion, they explore why mortgage rates have not followed the expected path after the Fed’s easing cycle and what factors may drive future rate movements. They offer a long-term perspective, and discuss how mortgage rates differ from Treasury rates. What constitutes a "normal" mortgage rate?

To access the Quantitative Perspectives article, click here. Login is required.

As 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.

Even with this extensive support, we often do not know how our models will be used. A model that is good for one use may not be appropriate for another. For example, valuation for hedging often is different from valuation for pricing and determining return on equity, or a model built on agency data may not be appropriate for agricultural mortgages. When we are asked or when we are provided with additional information about the client’s use, we can provide additional insight into whether the model is being used appropriately.

The determination of how a model should be employed starts with clarity on how the results of the model will be used. Note that the focus here is not on how reliable the model is or how it performs in sample or out of sample; rather, it is on what actions will be taken based upon the output of the model.

In the case of the Dodd-Frank Act Stress Test (DFAST) and the use of the stress tests to determine the Stress Capital Buffer (SCB), we know how the stress tests are being used by banking regulators and what actions are taken based upon the results of the stress test.

According to the Federal Reserve:¹ The original stress tests “played a role in bolstering confidence in the capital positions of U.S. banks during the 2007-09 financial crisis….” This, indeed, is an appropriate use for a system-wide stress test. In a time of crisis, with similar but uncertain risk throughout the financial system, a stress test may provide information about the health of the financial system and individual financial institutions that could not be determined using other measures of capital adequacy.

The Fed goes on to say that capital stress tests, “have become a critical supervisory tool” and are used to integrate “the Board's non-stress regulatory capital requirements with its stress-test-based capital requirements….” Here’s the rub. Did they become a critical supervisory tool and a basis for determining capital requirements because they were the right tool or because they were the tool that was available to the regulators to exercise discretion in setting capital requirements as they sought to replace the Advanced Approaches that utilized bank models?

Starting from basic principles, a stress test is not the best mechanism to establish capital requirements. Conceptually, capital is required to protect depositors and creditors from uncertainty. Expected losses should be built into reserves. Capital then is required for undiversified and unhedged tail risks that are borne by the financial institution. As these risks are associated with uncertainty they may not be reflected in any individual scenario. In fact, due to the availability of a wide range of financial instruments, banks can control the amount of risk in any single scenario at a modest cost and without reducing overall risk.

This creates a quandary for regulators. If they telegraph the detailed stress scenario in advance, institutions will be able to adjust their portfolios to enhance income in those scenarios, thereby reducing their required capital buffer, but not necessarily reducing risk across other potential scenarios. However, if they do not disclose the scenarios in advance, they can be (and have been) accused of being arbitrary.

The use of specific scenarios also creates issues associated with the use of models like AD&Co’s LoanDynamics Model or any model of borrower behavior within the stress test framework. Stress tests by their very nature involve scenarios that either have not occurred in the past or have been very infrequent. Moreover, no two actual stress events are the same. Thus, it is not possible to determine with precision how borrowers will behave. While models may and should provide a general indication of the performance of financial assets under stress, there may be substantial uncertainty.

Once again, the regulators face difficult choices. Should they allow each firm to develop and use their own models and recognize that there will be different results for similar assets under the same scenario at different institutions? Or should they seek consistency in results even in the face of this fundamental uncertainty? Neither solution seems quite right. Capital should reflect model risk as well as other economic uncertainties, so forcing use of a single set of modeling assumptions could increase systemic risk.

While it may seem like the current approach is beneficial if the stress scenario occurs and harmless otherwise, there are substantial costs and missed opportunities associated with the DFA Stress Tests. Firms (and the Fed) spend significant resources on the stress test because they have a direct impact on capital requirements and dividends. Those resources might be better spent on a broader set of risk measurement and risk management activities. Furthermore, stress tests may create a false impression that the banks have sufficient capital to withstand any stress or, even worse, that when stress emerges, that was not envisioned by the regulatory scenarios, such as the rate increases in 2022 and 2023, depositors and investors may have little confidence that the banks can weather the storm.

Even if the current implementation of stress tests isn’t the right approach to determining a capital buffer, can stress tests still be used to determine a capital buffer without revamping the entire capital regime?

A better approach to using stress tests would be to recognize that capital is required to bear a variety of uncertain risks. As such, other than when there is a dominant risk across the entire financial system, a variety of scenarios are required. A better approach would also recognize that interest rate risk in the banking book is not captured by current asset-based capital requirements, which focus on credit risk, scenarios which expose risk from rising and falling rates are also required. The introduction of the exploratory scenarios last year is a partial step in this direction. A better approach would also encourage financial institutions to explore the model risk associated with asset performance without penalizing firms for looking at more conservative scenarios.

This approach would involve five or possibly even ten scenarios to provide a robust evaluation of risk. 5 to 10 scenarios that are defined relative to current conditions that would stress credit, market risks, and interest rates. The scenarios could even have a counter-cyclical flavor. The Fed could choose one for the actual stress test that year (if there continues to be a requirement to have only one scenario) but with the expectation that firms would compute results and manage risk for all the scenarios since they wouldn’t know which one was going to be selected.

In this way, the stress test would operate like an exam where the professor tells you all the possible questions but only selects one or two for the final.

With a framework that includes multiple scenarios that can be consistent over time, stress tests can be a more valuable and reliable tool for determining stress capital requirements. During periods of system-wide stress, scenarios can be developed to bolster financial confidence, as during the Great Financial Crisis. In this way, scenario-based stress tests can be valuable both during and between periods of severe financial stress.

¹ “Stress Tests.” Federal Reserve Board - Stress Tests, June 22, 2022. https://www.federalreserve.gov/supervisionreg/stress-tests-capital-planning.htm.

We’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.

Is the New “New Normal” the Old Normal? Understanding Mortgage Rates

Explore why mortgage rates have not followed the expected path after the Fed’s easing cycle and what factors may drive future rate movements. We offer a long-term perspective and discuss how mortgage rates differ from Treasury rates, providing improved insights and benchmarks for market participants.

READ NOW

Valuation of Credit Risk Transfer with Embedded Calls 

Learn how to address the challenges of valuing embedded call options in credit risk transfer transactions. Using three different approximation methods, we explore more accurate ways to estimate the market value of these options, highlighting the advantages of each approach.

READ NOW

Both papers will be valuable resources for your work. A login is required for access. If you have any questions or would like to discuss the content in more detail, please contact support@ad-co.com.