Andrew Davidson & Co., Inc (AD&Co) is thrilled to announce an expanding relationship with a Third-Party Vendor! AD&Co enjoys working with countless analytical providers to offer our clients seamless solutions and we would like to welcome Milliman M-PIRe™ to the team!

Milliman’s Integrate Solutions have supported AD&Co’s LoanDynamics Model (LDM) for many years. We've expanded on that relationship to include Milliman M-PIRe™ software. Milliman M-PIRe™ now supports AD&Co’s Agency+ LoanDynamics Model (Agency LDM+) to offer clients an industry-leading solution. AD&Co’s Agency LDM+ forecasts prepayments, delinquencies, defaults and loss probabilities, which are fed into Milliman M-PIRe™, a valuation and securitization software that produces advanced analytics of structured mortgage credit risk (CRT).

Today’s financial markets have taught us the importance of evaluating and managing financial risks. Milliman’s integration of AD&Co’s Agency LDM+ into the M-PIRe™ solution allows reinsurers and mortgage insurers to analyze CRT transactions using a multi-model framework when implementing risk and portfolio management strategies.

AD&Co would like to thank Milliman for their unparalleled support of our Agency LDM+ in the M-PIRe™ software. We truly appreciate their dedication to servicing mutual clients to ensure their success.

Interested in learning more about joint Milliman M-PIRe™ and Agency LDM+ solution? Please contact Jonathan Glowacki at jonathan.glowacki@milliman.com.

The Federal Home Loan Bank of San Francisco directed the Urban Institute to develop innovative and actionable ideas to close the gap between white and black homeownership rates, which is as wide today as before the Fair Housing Act, enacted 60 years ago. Homeownership is crucial to a fairer society because working and middle-class families most commonly create inter-generational wealth by owning homes with amortizing mortgages. Urban Institute’s eighteen-month effort culminated in a symposium in February in Los Angeles attended by dozens of housing experts. The Borrowers Mutual Escrow Fund (BMEF), which I developed a few years ago, was included in the Urban Institute study, and I was invited to discuss it at the symposium.

A few key themes emerged from the symposium. One centers around replacing decades-old credit scores with modern metrics that better reflect borrower financial condition as the consumer financial footprint has become increasingly digitized, especially among minority populations. These metrics generally extend beyond traditional credit profiles to include other important measures of borrower financial condition such as digitized cash flow data, telecom/utility data and others. A fair amount of evidence already shows that modernized metrics assess homeownership readiness much better than old ones. Reducing uncertainty reduces cost.

Another theme that includes the BMEF, is that when trying to expand homeownership, liquidity and cash flow stability can be more critical to the success of marginal borrowers than traditional credit scores and down payments. Conscientious borrowers generally strive to restart paying their mortgages after short delinquencies if given the chance. Empirical support for this view includes delinquency performance through repeated climate events (e.g., hurricanes and floods) and the success of generalized forbearance during the COVID-19 pandemic.

This has turned decades of loss mitigation wisdom on its head. The Massachusetts state mortgage insurance program has included unemployment benefits for almost 20 years to resounding success. This program provides borrowers with fragile liquidity and volatile income, with a few months of payment reserves between jobs (e.g., consistently succeeds in preventing delinquency even through the financial crisis of 2007 and the COVID-19 pandemic). The GSEs and FHA have now made forbearance their initial loss mitigation response to borrower delinquency.

The BMEF proposes that borrowers put 3% of their house value into an administered escrow account instead of towards a down payment. It’s well-known that reserves are crucial to borrower success and placing reserves into escrow to be used for income interruption or unexpected maintenance will make reserves even more effective. Money in such accounts will always reduce risk compared with small down payments for borrowers, servicers, mortgage insurers and guarantors. This is provably true because the escrow funds are very liquid for payments, while the liquidity value of small down payments is effectively zero. Further evidence is that reperformance rates for delinquent borrowers are higher for borrowers with lower credit scores than for those with higher credit scores.

Borrowers pay mortgage insurance and guarantee fees to compensate insurers for risk, but it does not impact borrower ability to pay. By contrast, putting aside borrower funds for financial stress reduces risk throughout the value chain. Since it is borrower money in the first place, no subsidy is needed, but risk declines because liquidity is improved. Finally, borrower escrows managed by servicers for taxes and insurance are individual. However, BMEF escrows can be combined across borrowers to generate large diversification gains. Even among traditionally risky borrowers, perhaps 75% of them will never become delinquent, so it’s likely that the benefit limit can exceed the average contribution.

The Data Foundation of Mortgage Finance

Homeownership is the largest source of wealth accumulation and inter-generational wealth transfer for the working and middle class. However, the non-interest cost of financing is always an obstacle for first-time and low-wealth buyers, and underserved populations.

• How much of the up-front and the ongoing cost of mortgages arise from the cost of data?
• What is a Mortgage Data Exchange, and how does it make the mortgage data market more efficient and reduce the cost of originating, servicing, investing, studying, and regulating mortgage finance?

Join me as I speak on these at the virtual #HousingDC23 on Wednesday, September 27th at 3:30 PM ET on a panel titled “Expanding Access and Transparency Through Alternative Data.”

Click here to watch the session on demand now!

In this blog post, we used the recently updated Mortgage Market Statistical Annual to examine the dynamics of residential loan origination by state and by market segments and highlight important trends.

From mid-2020 until April 2022, the Fed Funds rate was zero and fixed rate mortgage rates were historically low at about 3% (see Figure 1). Thereafter, the Fed began raising the Fed Funds rate to 5% today and fixed rate mortgage rates have doubled. Mortgage payments became unaffordable to many potential buyers and the mortgage origination volume dropped drastically across market segments and states by 80%. Predictably, the refinance market disappeared. Figure 2 shows that the origination volume for different mortgage products decreased drastically from Q1 2021 to 2023.

Figure 1. 30-Year Mortgage Rate, Fed Funds Effective Rate and PCE Price Index

Figure 2. Origination Volume by Market Composition (Dollars in Billions)

Homeowners with low-rate mortgages have a strong financial incentive not to sell when facing the prospect of buying a new house with a mortgage rate twice as high (lock-in effect). These homeowners on the sidelines reduce both the supply and demand for housing. The countervailing impacts on price make the ultimate effect unclear; prices could rise or fall, but the changes are likely to moderate.

Figure 3 shows two things; (1) the housing price spike during the pandemic when rates were so low and the predicted recent collapse when rates rose and (2) turning points in housing prices lead to turning points in new construction rates weighted by population.

Figure 3. Housing Units Under Construction vs HPI

Looking at the States

Across the 50 states, plus Washington D.C. and Puerto Rico, origination dropped 48% from 2021 to 2022. For some background, YoY changes for the past few months have been positive, with 2019 to 2020 year-over-year (YoY) showing a 78% increase. We have to go back to 2016 to 2017 to see a negative 10% YoY drop and 2017 to 2018 a negative 9% drop. Among the most populous states, California suffered the largest drop YoY, declining by a whopping 60%. Some other states with a big YoY drop in origination include Maryland, 55%, Virginia, 54% and Massachusetts, 53%. On the other end, Texas and Florida had the smallest YoY losses at around 33%.

Figure 4 Originations by State

The situation in California, the most expensive state with the most expensive housing market was obvious; the escalating rate hikes priced many potential buyers out of the housing market in a state already hurt by the high income and property taxes.

The situations in Florida and Texas were drastically different. As low tax states, they represented good buying options even in a severe market turn and suffered the least drops.

Naturally, people are motivated to move to more tax-friendly states such as Florida when they retire. As the global pandemic hit and changed how people live and work, it further amplified that migration trend. Workers who once needed to live in states with hot employment markets like California’s tech hub can now work remotely and leave for other lower-cost states.

From Refinance to Purchase

The ten consecutive Fed rate hikes eliminated the refinance boom and deterred existing borrowers from moving, a combination leading to the plunge of origination. The refinance share has fallen from 71% in Q1 2021 to 16% in Q4 2022. On the turnover side, purchasing activities are still ongoing amidst the high rate environment. Purchase volume is not as drastically changed but still has fallen 13% from 2021. Figure 3 still shows a very steady volume of purchase originations over the past two years, despite its obvious decline over the past months. The decrease of the purchase volume can be attributed to the “lock in effect.”[1] The lock in effect is visible for discount mortgages as it deters potential sellers from giving up their current low-rate loan and finance next property with a more expensive one even if they have plans to relocate.

Figure 5. Purchase vs Refi Origination Volume (Dollars in Billions)

Looking Forward

We will continue to monitor changes in origination trends and their connection with affordability and home prices in our borrower behavior and home price modeling. For additional insight, read AD&Co’s HPI Outlook Update by Alex Levin.[2]

[1] Baker, Joni, and Daniel Swanson. “How to Use AD&Co’s Deep Discount and Super Premium S-Curve Tuning.” Quantitative Perspectives (May 2023).

[2] Levin, Alex. “AD&Co’S HPI Outlook Update: Flat, But Multidirectional.” The Pipeline, no. 182 (June 2023).

Andrew Davidson & Co., Inc. (AD&Co) is pleased to announce the official release of Kinetics v1.10, the latest update to AD&Co’s modular platform for running the AD&Co suite of analytics. This update introduces the Multifamily LoanDynamics Module, the newest way to run Multifamily LoanDynamics Model (LDM). Investors, servicers, insurers and lenders can leverage this new module to better understand the prepayment and credit risk of their multifamily mortgage portfolio.

The Multifamily LoanDynamics Module joins MSRKinetics, PoolKinetics, the LoanDynamics Module, and the Auto LoanDynamics Module on the Kinetics platform. With this release, all flavors of LDM (Agency, Non-Agency, Auto, and Multifamily) are supported in Kinetics.

Kinetics v1.10 also includes enhancements to the LoanDynamics Module for single-family mortgages, including support for global tunings, a new Lifetime Results report with metrics such as WAL and lifetime CPR, and integration with the latest version of LDM: v3.0.3 patch 1.

Users can access the Multifamily LoanDynamics Module via the Kinetics desktop application (Windows), a web browser, or integration with the Kinetics REST API. AD&Co can provide a developer kit to those interested in integrating the Kinetics Web Service with their proprietary system.

Ready to schedule a demo of Multifamily LoanDynamics Module? Contact us to get started.

Multifamily LoanDynamics Module Portfolio

Multifamily LoanDynamics Module Custom Prepayment Penalty Points

Multifamily LoanDynamics Module Results