Welcome to The Pipeline, Andrew Davidson & Co., Inc.‘s monthly newsletter — a “pipeline” of relevant and useful information, focused on recent trends, changes and advances in the mortgage investor’s market. We value your input and urge you to contact us with questions, comments or article suggestions. Enjoy. http://www.ad-co.com/pubs_pipeline_archives en-us <div class="article"> <h4>Celebrating 20 Years in Analytics by Simone Davis</h4> <div class="content"><p>Preparation is underway for our 20th Annual Conference, &#8220;Innovation amid Uncertainty&#8221; on June 13, 2012 and this year we&#8217;ve decided to do things a little differently. In the morning, sessions will focus on innovations in AD&amp;Co models; however, the afternoon will feature several options. Attendees can attend policy discussions on <span class="caps">GSE</span> Reform in the main auditorium, or choose to attend smaller breakout sessions where you will have the opportunity to meet the modelers, interact with our model validation team and have an in-depth discussion about our models in a more intimate setting. We hope that this format will give you greater flexibility to plan the day the way that is most appropriate for you, and to make the best use of your time and our resources.</p> <p>You should have received your email <a href="http://www.ad-co.com/Conference/Annual2012/Invite">invitation</a> by now. If not, please let us know. If you would like to see the preliminary agenda, check out the hotels in the area, or need directions to the venue, please link to our <a href="http://www.ad-co.com/about_news_and_events">News and Events</a> page.</p> <p>For more information, contact Ashlea Bonds, <a href="mailto:ashlea@ad-co.com">ashlea@ad-co.com</a>, 212-274-9075.</p> <p>Remember, this year the conference will be at:</p> <p><b>The Graduate Center</b><br /> <b>City University of New York</b><br /> <b>365 Fifth Avenue @ 34th Street, Concourse Level</b><br /> <b>New York City</b></p> <p>We hope to see you there!</p></div> <div class="article-link"><a href="/newsletters/2012/May2012/Update_May12.pdf">Open this article...</a></div> </div> <div class="article"> <h4>A CreditProfile™ of SEMT 2012-2 by Richard Ellson, PhD. and William Searle</h4> <div class="content"><p>At the end of March, Sequoia issued its second transaction of the year. This paper contains an analysis of the deal&#8217;s loans, a CreditProfile™ of the securities, and a discussion of the ratings agencies&#8217; disputes over post-crisis issuance.</p></div> <div class="article-link"><a href="/newsletters/2012/May2012/Credit_May12.pdf">Open this article...</a></div> </div> <div class="article"> <h4>Model Validation: Ideas and Application to LDM by Eknath Belbase</h4> <div class="content"><p>Andrew Davidson &amp; Co., Inc. (AD&amp;Co) has been in the model development business for almost 20 years. The vast majority of our clients rely heavily on quantitative analysis and models (from a variety of internal and external sources) for their financial decision-making and reporting. In this article, we discuss both a process and mindset called model validation which complements and reinforces the model development, estimation and testing process which has been our core business. We begin by defining model validation and its uses, discussing a circular from the Office of the Comptroller of the Currency (<span class="caps">OCC</span>) on this topic, and our general framework. Next, we cover in-depth a recent validation performed on our LoanDynamics™ model (<span class="caps">LDM</span>) as a case-study in applying our framework. Finally, we conclude with plans for how we will apply model validation going forward, both to our internal models, and as an external service for clients looking for expert third-party evaluations of models or quantitative analysis they are using for decision-making or reporting.</p></div> <div class="article-link"><a href="/newsletters/2012/May2012/Credit2_May12.pdf">Open this article...</a></div> </div> Fri, 04 May 2012 12:52:57 -0400 http://www.ad-co.com/pubs_pipeline_archives?by_date=93 http://www.ad-co.com/pubs_pipeline_archives?by_date=93 <div class="article"> <h4>Twitter & Transitions by Simone Davis</h4> <div class="content"><p><b>Are you on Twitter? We are!</b></p> <p>Follow <a href="http://twitter.com/#!/ADCoAnalytics">@ADCoAnalytics</a> to stay up-to-date with the latest AD&amp;Co events, webinars, models, and announcements. If don&#8217;t already have a Twitter account, go <a href="https://twitter.com/signup">here</a> to sign up.</p> <p><b>(DT) Transition</b></p> <p>In this issue of the Pipeline, Daniel Swanson, senior credit modeler, discusses the factors that drive the movement of loans from <a href="http://www.ad-co.com/newsletters/2012/Mar2012/Credit_Mar12.pdf">Delinquent (D) to Terminated (T) status within the AD&amp;Co LoanDynamics™ Model</a>. This transition is unique because loans can terminate from the delinquent bucket due to prepayment or default.</p> <p>Included below are links to documentation on other model transitions.</p> <p>• <a href="http://www.ad-co.com/pubs_pipeline_article/304">The Cure Transition: Trends for Loans Going from Delinquent (D) to Current &#169; Status</a><br /> • <a href="http://www.ad-co.com/pubs_pipeline_article/304">The Recovery Transition: Trends for Loans Going from Seriously Delinquent (S) to Current &#169; Status</a><br /> • <a href="http://www.ad-co.com/qp_library/Paper_Current-to-Term%20in%20LDM_D.Szakallas_May2010.pdf">Current-to-Termination Model for LoanDynamics™ </a><br /> • <a href="http://www.ad-co.com/qp_library/CurrentToDelinquent_Dec2009.pdf">Current-to-Delinquent Model for LoanDynamics </a></p></div> <div class="article-link"><a href="/newsletters/2012/Mar2012/Update_Mar12.pdf">Open this article...</a></div> </div> <div class="article"> <h4>How to Validate a Home Price Model: Excerpts from AD&Co's HPI2 Model Review by Alex Levin</h4> <div class="content"><p><i>Validation</i> has become a popular word at Andrew Davidson &amp; Co., Inc. (AD&amp;Co) as we are making efforts to expose our models’ performance to clients and prospects. For example, we designed online reports that let users check how our prepayment model or LoanDynamics™ model performed relative to actual datasets (selected and filtered live on the screen). Visual images along with objective statistical measures deliver convincing evidence of our model’s strengths and limitations.</p></div> <div class="article-link"><a href="/newsletters/2012/Mar2012/HPI_Mar12.pdf">Open this article...</a></div> </div> <div class="article"> <h4>The Delinquent Prepayment Transition: Trends for Loan Going From Delinquent (D) to Terminated (T) by Daniel Swanson</h4> <div class="content"><p>This paper is a part of a recent series of studies Andrew Davidson &amp; Co., Inc. (AD&amp;Co) performed on &#8220;back-end transitions,&#8221; transitions between delinquency statuses after delinquency occurs. Other transitions studied in the series are delinquent-to-current (DC), seriously delinquent-to-current (SC), and seriously delinquent-to-terminated (ST).</p> <p>The Delinquent to Termination model estimates the probability that borrowers who have missed between two and five payments will pay off the entire balance of their loan. There are a number of ways for this to happen and this transition is unique in that such a transition might be either a prepayment or a default.</p></div> <div class="article-link"><a href="/newsletters/2012/Mar2012/Credit_Mar12.pdf">Open this article...</a></div> </div> <div class="article"> <h4>AD&Co Model Updates by Dan Szakallas</h4> <div class="content"><p>Last month, Andrew Davidson &amp; Co., Inc. (AD&amp;Co) released a patch for Prepayment Model version 5.2h along with some new tuning parameters. The release notes can be found <a href="http://www.ad-co.com/vectors_version_release_notes">here</a> for our prepayment model) and <a href="http://www.ad-co.com/vectors_version_release_notes_ldm">here</a> for LoanDynamics™ (<span class="caps">LDM</span>). The overall goal of this release was to address a few issues that came up recently, most notably the widening of the spread between the primary and secondary rates and the prepayment forecasts for recent non-agency originations. We have introduced new tuning files that allow us (and users) the ability to easily apply global tunings to all models if the need arises. In this case, it was done to address the fact that since the AD&amp;Co models use the secondary rates as the driver of interest-rate incentive, the widening spread was causing it to forecast accelerated prepayment speeds. Also, within the tuning files are new vintage-based tunings for the <span class="caps">LDM</span> model for 2009-2012 collateral, based on analysis of the <span class="caps">SEMT</span> deals issued during that timeframe. The huge shift in underlying borrower characteristics in 2009 necessitated the need for these tunings, in much the same way they were needed in the prepayment model when looking at the difference between pre-2008 vintages and post-2008 vintages.</p></div> <div class="article-link"><a href="/newsletters/2012/Mar2012/Performance_Mar12.pdf">Open this article...</a></div> </div> Tue, 20 Mar 2012 13:01:43 -0400 http://www.ad-co.com/pubs_pipeline_archives?by_date=92 http://www.ad-co.com/pubs_pipeline_archives?by_date=92 <div class="article"> <h4>D.C. Roundtable Wrap-Up; Save the Date for AD&Co's 20th Annual Conference by Simone Davis</h4> <div class="content"><p>2012 is shaping up to be an interesting year for all in the mortgage market as much of the industry evaluates proposals designed to promote the re-introduction of private capital. AD&amp;Co has taken a pro-active approach to gain consensus on this initiative and recently hosted a roundtable discussion in Washington D.C. on February 7, 2012. Seventy-five participants representing a broad cross-section of the mortgage market gathered to discuss the required incentives for issuers, investors and regulatory environment needed to promote the return of private capital. In this issue of the Pipeline, we provide a link to the <a href="http://www.ad-co.com/pubs_docs/Public Letters/ADavidson_GSERiskSharingRoundtable_02_2012.pdf">summary</a> of our recommended approach along with a recap of the discussion that took place in Washington. Click <a href="http://www.ad-co.com/pubs_pipeline_article/310">here</a> to link to the full strategy corner article on policy insights.</p> <p><b>Save the Date for AD&amp;Co&#8217;s 20th Annual Conference </b></p> <p>AD&amp;Co&#8217;s 20th Annual Conference is going to be held on <strong>Wednesday, June 13, 2012</strong>. Also, this year we will meet in a new location, the <strong>City University of New York</strong>, <strong>Graduate Center </strong>located at <strong>365 Fifth Avenue near 34th Street</strong>. We are so excited to share this new space with you. We are busy drafting the agenda and possible topics, so stay tuned to our <a href="http://www.ad-co.com/about_news_and_events">News &amp; Events</a> page for more information and to sign up!</p></div> <div class="article-link"><a href="/newsletters/2012/Feb2012/Update_Feb12.pdf">Open this article...</a></div> </div> <div class="article"> <h4>The Recovery Transition: Trends for Loans Going from Seriously Delinquent (S) to Current (C) Status by Sanj Chatterjee</h4> <div class="content"><p>The AD&amp;Co LoanDynamics™ Model is a transition model that forecasts not only prepayment and default rates, but also a number of intermediate roll rates. One of the transitions involves seriously delinquent loans that recover and become current again. This article looks at current trends for loans going from the seriously-delinquent to current (SC) state, also sometimes called the recovery transition. For this study, we used data obtained from the Wells Fargo Trustee website. The data covers the period from 2003–2011.</p></div> <div class="article-link"><a href="/newsletters/2012/Feb2012/Credit_Feb12.pdf">Open this article...</a></div> </div> <div class="article"> <h4>Getting Private Capital in Front of the Taxpayer within the Current GSE Framework by Eknath Belbase and Richard Ellson</h4> <div class="content"><p>On February 7, 2012, Andrew Davidson &amp; Co., Inc. (AD&amp;Co) hosted a roundtable discussion in Washington, D.C. on the topic of introducing more private capital to taxpayers within the current <span class="caps">GSE</span> framework. The 75 participants represented a broad cross-section of the mortgage market. The intention was to focus on intermediate-term solutions that can be applied, without waiting for the ultimate status of the GSEs to be determined. In this article, we summarize the topics that were discussed at the meeting. A summary description of our recommended approach and some background written by Andy Davidson can be found <a href="http://www.ad-co.com/pubs_docs/Public%20Letters/ADavidson_GSERiskSharingRoundtable_02_2012.pdf">here</a>.</p></div> <div class="article-link"><a href="/newsletters/2012/Feb2012/Strategy2_Feb12.pdf">Open this article...</a></div> </div> <div class="article"> <h4>AD&Co CreditProfile™ Analysis of SEMT 2012-1 by Richard Ellson and Will Searle</h4> <div class="content"><p>On January 20, 2012, the <span class="caps">SEMT</span> 2012-1 transaction was priced. This was the first new issue non-agency <span class="caps">RMBS</span> deal of the year, and it represents the fourth <span class="caps">SEMT</span> issuance over the past three years. The size of the deal was $415.7 million, and the collateral consisted of 446 loans. While there were a number of similarities between this deal and prior transactions, there were also some substantive differences.</p></div> <div class="article-link"><a href="/newsletters/2012/Feb2012/Credit2_Feb12.pdf">Open this article...</a></div> </div> <div class="article"> <h4>The SSFA: A Step Backwards by Anne Ching and Will Searle</h4> <div class="content"><p>In December 2011, the Office of the Comptroller of the Currency (<span class="caps">OCC</span>), the Federal Reserve Board (<span class="caps">FRB</span>) and the Federal Deposit Insurance Corporation (<span class="caps">FDIC</span>) jointly proposed regulations that would replace the use of external credit ratings for calculating risk-based capital for debt and securitization positions under the market risk capital rules published in the January 2011 notice of proposed rulemaking (<span class="caps">NPR</span>). While we support the Agencies&#8217; (<span class="caps">OCC</span>, <span class="caps">FRB</span> and <span class="caps">FDIC</span>) overall goal of reducing reliance on external credit ratings as a method of evaluating credit risk, we believe that the proposed alternative is seriously flawed and in many ways would be worse than the ratings-based system. This article outlines our ideas. For the full comment letter submitted on February 3, 2012, please click <a href="http://www.ad-co.com/pubs_docs/Public%20Letters/ADavidson_RiskBasedCapitalGuidelines_Feb_2012.pdf">here</a>.</p></div> <div class="article-link"><a href="/newsletters/2012/Feb2012/Strategy_Feb12.pdf">Open this article...</a></div> </div> Fri, 17 Feb 2012 15:49:01 -0500 http://www.ad-co.com/pubs_pipeline_archives?by_date=91 http://www.ad-co.com/pubs_pipeline_archives?by_date=91 <div class="article"> <h4>On with the Show by Simone Davis</h4> <div class="content"><p><span class="caps">ASF</span> 2012 starts this Sunday, January 22nd and AD&amp;Co kicks off the New Year in full swing. Stop by our booth (#120) and treat yourself to a demo of our new product, CreditProfile™ or talk to our support team about our analytic solutions and models. If you would like to set-up a private meeting, please contact Rob Landauer, <a href="mailto:rob@ad-co.com">rob@ad-co.com</a>.</p> <p>In addition, there will be two exclusive articles available at our booth during <span class="caps">ASF</span> that are not our January issue of the Pipeline. These two credit commentaries address the GSEs guarantee fee increase and seriously delinquent to current loan trends. Be the first to read our analytical insight and pick up a copy in the Aria&#8217;s Bristlecone Ballroom exhibition hall.</p> <p>Andrew Davidson will moderate a general session on the <em>Future of U.S. Mortgage Finance</em> in <b>Pinyon Ballrooms 4 &amp; 5, Monday, January 23rd at 11:45am</b>. For all those looking for insight into what the future may hold in the housing market, this is the event you want to attend.</p> <p>Eknath Belbase, our senior consultant will be speaking on <b>Sunday at 2:20pm in the Pinyon Ballroom 3</b> for the <em>Securitization Pricing and Valuation Tools Breakout Session</em>. Stop by and discover the analytical tools available for pricing and valuation.</p> <p><b>Update your model license keys!</b></p> <p>Your current keys will expire at the end of January and need to be replaced with a new key. We sent email notifications announcing the release of the new license keys which are available for download through the My AD&amp;Co portal on our website. If you did not receive an email from us, please contact Cody, <a href="mailto:cody@ad-co.com">cody@ad-co.com</a> or Rashad, <a href="mailto:rashad@ad-co.com">rashad@ad-co.com</a>.</p> <p>See you in Vegas!</p></div> <div class="article-link"><a href="/newsletters/2012/Jan2012/Update_Jan12.pdf">Open this article...</a></div> </div> <div class="article"> <h4>The Cure Transition: Trends for Loans Going from Delinquent (D) to Current (C) Status by William Searle</h4> <div class="content"><p>This paper is a part of a recent series of studies Andrew Davidson &amp; Co., Inc. (AD&amp;Co) performed on &#8220;back-end transitions.&#8221; By &#8220;back-end&#8221; transitions we mean those transitions between delinquency statuses that occur after delinquency occurs. Other transitions studied in the series are delinquent-to-terminated (DT), seriously delinquent-to-current (SC), and seriously delinquent-to-terminated (ST).</p> <p>DC is the transition from being delinquent to current. Delinquent is defined as 60- to 150-days in arrears, following the mortgage banking association (<span class="caps">MBA</span>) definition. Traditionally these &#8220;cures&#8221; occurred as borrowers temporarily fell behind in their mortgage payments and then caught up. Since the credit crisis began, however, a greater portion of delinquencies have been caused by more permanent conditions, such as job loss and negative home equity. Additionally, modification programs have caused cures that would not otherwise naturally occur. This paper discusses the effect of these and other trends on the overall cure rate.</p></div> <div class="article-link"><a href="/newsletters/2012/Jan2012/Credit_Jan12.pdf">Open this article...</a></div> </div> <div class="article"> <h4>On Primary-Secondary Spread Modeling by Alex Levin</h4> <div class="content"><p>Mortgage market rates play a crucial role in modeling borrower behavior and economic factors such as home prices. In prepayment and default models, it enters into a borrower&#8217;s incentive to obtain a new loan (refinance). In home-price modeling, it enters our perception of a housing price index (<span class="caps">HPI</span>) equilibrium change, thus, <span class="caps">HPI</span> in the future. The question each <span class="caps">MBS</span> modeler has to ask is: &#8220;Which rate is the mortgage market rate?&#8221;</p> <p>The choice made by AD&amp;Co many years ago was to use the secondary-market rate, so-called current coupon, and add a typical primary-secondary spread of 50 basis points (bp). Whereas the company&#8217;s analysts clearly understood this approach as being an approximation, the current coupon rate&#8217;s availability and reliability outweighed other options. Secondary-market rates for most widely traded <span class="caps">MBS</span> products are known on a continuous basis, hence, any analytical product built around them can be used by real-time traders.</p></div> <div class="article-link"><a href="/newsletters/2012/Jan2012/Valuation_Jan12.pdf">Open this article...</a></div> </div> <div class="article"> <h4>What Does Investment Grade Mean? by Eknath Belbase</h4> <div class="content"><p>Andrew Davidson &amp; Co., Inc. (AD&amp;Co) recently responded to a Notice of Proposed Rulemaking (<span class="caps">NPR</span>) issued by the Office of the Comptroller of the Currency (<span class="caps">OCC</span>) entitled &#8220;Alternatives to the Use of External Credit Ratings in the Regulations of the <span class="caps">OCC</span> and Guidance on Due Diligence Requirements in Determining Whether Investment Securities Are Eligible for Investment.&#8221; Interested readers can read our full response (which is part of the public record) at <a href="http://www.ad-co.com/pubs_papers">http://www.ad-co.com/pubs_papers</a>.</p></div> <div class="article-link"><a href="/newsletters/2012/Jan2012/Strategy_Jan12.pdf">Open this article...</a></div> </div> <div class="article"> <h4>A Prepayment Update: GSEs Guarantee Fee Increase by Dan Szakallas</h4> <div class="content"><p>On December 29th, 2011, the Federal Housing Finance Agency (<span class="caps">FHFA</span>) acting director Edward Demarco released a statement detailing the increase to the guarantee fee charged by Fannie Mae and Freddie Mac, as part of the Temporary Payroll Tax Cut Continuation Act of 2011. The entire statement can be found here. As part of the legislation, <span class="caps">FHFA</span> is increasing the guarantee fee by no less than 10 basis points (bp), effective April 1st, 2012. This increase affects all single-family residential mortgages, and the additional 10 bp in fees will be remitted to the U.S. Treasury instead of being retained by the GSEs. Additionally, the minimum initial increase shall be 10 bp, with the plan to have that number rise over a two-year period per a schedule to be determined after <span class="caps">FHFA</span> conducts more research on the subject.</p></div> <div class="article-link"><a href="/newsletters/2012/Jan2012/Special_Jan12.pdf">Open this article...</a></div> </div> Fri, 20 Jan 2012 18:54:27 -0500 http://www.ad-co.com/pubs_pipeline_archives?by_date=90 http://www.ad-co.com/pubs_pipeline_archives?by_date=90 <div class="article"> <h4>Happy Thanksgiving! by Simone Davis</h4> <div class="content"><p>As we approach the holiday season, Andrew Davidson &amp; Co. would like to thank all of our clients, business partners and friends for the interactions we&#8217;ve shared over the past year. Thanksgiving reminds us to take a moment from our festivities to think of those less fortunate.</p> <p>In this issue of the Pipeline, AD&amp;Co presents three timely pieces highlighting issues in the current housing market. We feature a strategy corner piece that discusses the impact of <span class="caps">HARP</span> revisions and underwater borrowers. Alex Levin&#8217;s valuation commentary addresses refinancing fear and arbitrage. Daniel Swanson&#8217;s article illustrates the dynamics of Credit Burnout. Take a look and feel free to contact us for more information.</p></div> <div class="article-link"><a href="/newsletters/2011/Nov2011/Update_Nov11.pdf">Open this article...</a></div> </div> <div class="article"> <h4>Dealing with Underwater Borrowers: HARP revisions by Eknath Belbase and Dan Szakallas</h4> <div class="content"><p>This article examines the economic impact of the recently proposed changes to the Home Affordable Refinance Program (<span class="caps">HARP</span>) that would allow more underwater agency borrowers to refinance into market-rate mortgages. We begin by going over the precise changes to the program and the target borrower set. We then look at data to examine the likely impact, both at a national level and at a more geographically granular level. We conclude with a more general discussion of alternatives to dealing with the remaining performing underwater population.</p></div> <div class="article-link"><a href="/newsletters/2011/Nov2011/Strategy_Nov11.pdf">Open this article...</a></div> </div> <div class="article"> <h4>Refinancing Fever and Arbitrage by Alex Levin</h4> <div class="content"><p>Refinancing fever during the credit crisis? Yes, we are talking about the current mortgage-backed securities (<span class="caps">MBS</span>) market, not the one observed in summer of 2003. While the underwriting standards have been strict, with the number of major originators down to four or five, and a stagnant origination capacity, there are signs that prepayment speeds may go up. This is clearly manifested in <span class="caps">MBS</span> prices with both IOs and TBAs declining in value. Hence, the wide <span class="caps">OAS</span> levels we observe may not point to sweet investment opportunities, but rather to a price for bearing a risk of losing part of value due to refinancing. Furthermore, while the IO/PO market and the <span class="caps">TBA</span> market share the sentiments, they price the risk differently, thereby creating arbitrage opportunities.</p></div> <div class="article-link"><a href="/newsletters/2011/Nov2011/Valuation_Nov11.pdf">Open this article...</a></div> </div> <div class="article"> <h4>The Return of Credit Burnout by Daniel Swanson</h4> <div class="content"><p>While foreclosures continue to dominate the news, there&#8217;s one positive trend hasn&#8217;t received much attention, the decrease in new delinquencies. Since the end of 2008, there has been a noticeable drop in the rate at which current borrowers become delinquent. While there a number of possible explanations for this phenomenon, this article looks at one effect in particular &#8212; credit burnout &#8212; and investigates its potential to explain the trend.</p></div> <div class="article-link"><a href="/newsletters/2011/Nov2011/Credit_Nov11.pdf">Open this article...</a></div> </div> Wed, 23 Nov 2011 12:14:43 -0500 http://www.ad-co.com/pubs_pipeline_archives?by_date=89 http://www.ad-co.com/pubs_pipeline_archives?by_date=89 <div class="article"> <h4>Our One-Hundredth Issue of the Pipeline! Introducing CreditProfile™ by Simone Davis</h4> <div class="content"><p>By a twist of fate, the 100th issue of the Pipeline coincides with the announcement of CreditProfile™, our powerful, objective, quantitative tool for measuring, monitoring and managing the credit risk of residential mortgage-backed securities (<span class="caps">RMBS</span>). The web-based service provides timely, unbiased scores for four types of credit risk; Breakpoint Ratio, Effective Thickness, Average Loss and Expected Shortfall, as well as an overall composite score called CreditProfile™ Category (<span class="caps">CPC</span>). Investors can use this tool to monitor changing credit characteristics of their investments. To read the official press release, click <a href="http://www.ad-co.com/adco_inthenews_docs/PressRelease_10_17_2011.pdf">here</a>.</p> <p>Eknath Belbase provides an introduction to and overview of CreditProfile™ in this month’s Strategy Corner article. He breaks down the four main metrics used within the application. To read this article, click <a href="http://www.ad-co.com/newsletters/2011/Oct2011/Strategy_Oct11.pdf">here</a>.</p> <p>AD&amp;Co will host a CreditProfile™ webinar on Tuesday, October 25, 2011 at 2pm <span class="caps">EST</span> to illustrate the features of this new product as well as answer any questions. Click here to <a href="http://www.ad-co.com/Conference/Webinars/Invite2">register</a>.</p> <p>All Pipeline recipients are automatically enabled for a free trial of CreditProfile™, which will allow your firm to run up to 5 unique CUSIPs per quarter free of charge. You must have a username and password to access your trial. To register for a password, please click <a href="http://customer.ad-co.com/welcome/demo_request">here</a>.</p> <p>CreditProfile™ is an unregistered trademark of Andrew Davidson &amp; Co., Inc.</p></div> <div class="article-link"><a href="/newsletters/2011/Oct2011/Update_Oct11.pdf">Open this article...</a></div> </div> <div class="article"> <h4>MBS Credit Risk in a Post-Crisis World: A More Complete View by Eknath Belbase</h4> <div class="content"><p>In several previous articles, we have discussed the evolving role of ratings in a post Dodd-Frank world, including the inappropriateness of using ratings vs. the benefits of analytical approaches to risk-based capital. Then, at our June conference, as part of his talk entitled &#8220;Scenario-Based Credit Analysis: From Loans to Securities,&#8221; Will Searle introduced AD&amp;Co&#8217;s CreditProfile™, a new bond credit analysis tool which includes ES as a sub-measure. In this article, we briefly review CreditProfile™&#8217;s principal measures. We then examine what these measures tell us in relation to the information embedded in ratings and look at some example bonds. Finally, we discuss applications that these more complete credit risk measures enable or enhance, in a world where ratings are no longer the sole risk grade assigned to non-agency bonds.</p></div> <div class="article-link"><a href="/newsletters/2011/Oct2011/Strategy_Oct11.pdf">Open this article...</a></div> </div> <div class="article"> <h4>LoanDynamics™ Model Performance Reports by Nadya Derrick</h4> <div class="content"><p>Andrew Davidson &amp; Co., Inc. is pleased to announce new LoanDynamics™ (<span class="caps">LDM</span>) performance reports, now available on the Mortgage Analysis and Performance Reporting portion of our website. In these reports, forecasted model predictions can be compared with actual mortgage-loan behavior. The available comparison metrics are voluntary (<span class="caps">CRR</span>) and non-voluntary (<span class="caps">CDR</span>) prepayment speeds, total termination speeds (<span class="caps">CPR</span>), severity, cumulative loss rate, and AD&amp;Co defined transitions.</p></div> <div class="article-link"><a href="/newsletters/2011/Oct2011/Credit_Oct11.pdf">Open this article...</a></div> </div> Mon, 17 Oct 2011 16:57:39 -0400 http://www.ad-co.com/pubs_pipeline_archives?by_date=88 http://www.ad-co.com/pubs_pipeline_archives?by_date=88 <div class="article"> <h4>Wonders of Fall by Simone Davis</h4> <div class="content"><p>With the winds of Fall on our heels, Andrew Davidson &amp; Co. has a lot of exciting news to share. We’ve been busy fine-tuning our tools and reports to bring you more efficient ways to compare our model forecasts to actual results. The redesigned Mortgage Analysis &amp; Performance Reporting in the Online Tools &amp; Reports area of the AD&amp;Co website highlights our new Prepayment Trend Reports. The Trend Reports provide monthly performance updates that compare actual mortgage prepayments with those predicted by our models. To read more about this feature, read Hikmet Senay’s Prepayment <a href="http://www.ad-co.com/newsletters/2011/Sep2011/Prepayment_Sep11.pdf">Update</a> in today’s Pipeline.</p> <p><b><span class="caps">ABS</span> East 2011</b></p> <p>The AD&amp;Co Team will be attending the <span class="caps">ABS</span> East Conference, <b>October 16-18th</b> at the Fontainebleau Hotel in Miami, FL. We will be demonstrating our new analytical approach to assessing credit risk so be sure to find us on the exhibition floor. Our booth number and location have not yet been announced. We will post this information on our website under the <a href="http://www.ad-co.com/about_news_and_events">News &amp; Events</a> section as soon as it&#8217;s released.</p> <p>Andy Davidson will be speaking on <b>Sunday, October 16th at 2:50pm</b> as a participant on the &#8220;Assessing Credit Risk in the <span class="caps">RMBS</span> Sector&#8221; panel. If you would like to set-up a meeting with Rob Landauer, our Director of Business Development, please email <a href="mailto:rob@ad-co.com">rob@ad-co.com</a>.</p></div> <div class="article-link"><a href="/newsletters/2011/Sep2011/Update_Sep11.pdf">Open this article...</a></div> </div> <div class="article"> <h4>AD&Co Updates its HPI Outlook by Alex Levin</h4> <div class="content"><p>With the recent release of the Federal Housing Finance Agency (<span class="caps">FHFA</span>) housing market data for 2011Q2, we have updated our home price outlook. The Home Price Index (<span class="caps">HPI</span>) paths used for simulation and Mortgage-Backed Security (<span class="caps">MBS</span>) valuation (i.e., the Credit <span class="caps">OAS</span> process) will be affected accordingly.</p></div> <div class="article-link"><a href="/newsletters/2011/Sep2011/HPI_Sep11.pdf">Open this article...</a></div> </div> <div class="article"> <h4>Prepayment Trend Reports by Hikmet Senay</h4> <div class="content"><p>Andrew Davidson &amp; Co., Inc. (AD&amp;Co) is pleased to introduce a new series of online trend reports for monitoring and reporting the performance of its prepayment models. Prepayment Trend Reports, which are accessible from Mortgage Analysis &amp; Reporting in the Online Tools &amp; Reports area of the AD&amp;Co website, provide monthly performance updates that compare actual mortgage prepayments with those predicted by our models.</p></div> <div class="article-link"><a href="/newsletters/2011/Sep2011/Prepayment_Sep11.pdf">Open this article...</a></div> </div> <div class="article"> <h4>Foreclosure Timelines: A Mid-Year 2011 Report by Sanjeeban Chatterjee</h4> <div class="content"><p>We are now in the second half of 2011 and have a better understanding of foreclosure dynamics during the first half of the year. It can be said clearly that the foreclosure process has not shown any signs of improvement.</p> <p>In a <a href="http://www.ad-co.com/pubs_pipeline_article/280">March 2011</a> Pipeline article, we looked at foreclosure timelines through the end of 2010. Looking at the 2011 numbers so far, it is clear that the foreclosure process has been stagnating. There are various reasons for this. The main factors seem to be legislative, social and regulatory issues, coupled with legal problems and constraints at both the state and national levels. The economy is not doing any better, and neither is housing.</p></div> <div class="article-link"><a href="/newsletters/2011/Sep2011/Credit_Sep11.pdf">Open this article...</a></div> </div> <div class="article"> <h4>A Credit Assessment of SEMT 2011-2 and a Comparison to 2011-1 by Richard Ellson, Ph. D. and Alex Levin</h4> <div class="content"><p>On September 16, a new jumbo non-agency Residential Mortgage-Backed Securities (<span class="caps">RMBS</span>) transaction was priced—SEMT 2011-2. Redwood Trust was again the sponsor. This represents the third <span class="caps">SEMT</span> transaction over the past two years and the second this year. <span class="caps">SEMT</span> 2011-1 was priced in February.</p></div> <div class="article-link"><a href="/newsletters/2011/Sep2011/Special_Sep11.pdf">Open this article...</a></div> </div> Fri, 23 Sep 2011 12:36:44 -0400 http://www.ad-co.com/pubs_pipeline_archives?by_date=87 http://www.ad-co.com/pubs_pipeline_archives?by_date=87 <div class="article"> <h4>Prepayment, Home Prices and Strategy by Simone Davis</h4> <div class="content"><p>This mid-summer issue of the Pipeline is packed with news and updates.</p> <p>First, modeler Dan Szakallas shares information about the newly issued tuning recommendations for our prepayment model based on new <span class="caps">HPI</span> data and market activity. If you are using our 5.2h model, these new recommendations are set to remain in place until 12-2013. Dan spent hours scouring through the new data to deliver these tunings, complete with colorful comparison charts highlighting <span class="caps">OAS</span> and <span class="caps">OAD</span> pricing. Click <a href="http://www.ad-co.com/pubs_pipeline_article/288">here</a> to see for yourself.</p> <p>Speaking of pricing, Alex Levin has a new <a href="http://www.ad-co.com/pubs_pipeline_article/289">Home Price Modeling and Forecasting</a> article on Borrowers’ <span class="caps">HPI</span> using both <span class="caps">FHFA</span> and Radar Logic Data. He utilizes the two data sources to show how we plan to create a non-distressed index. His layout includes Radar Logic’s collection of both sales counts and prices from two different transactions. See Alex’s 3-step “Action Plan” on page 5.</p> <p>For those of you that have your eye on the regulatory influences in the market, we have a new <a href="http://www.ad-co.com/pubs_pipeline_article/290">Strategy Corner</a> based on our public comment on “Credit Risk Retention.” We explore the four main options proposed, <span class="caps">QRM</span> definitions, and provide an analysis of risks as well as a distinction between economic and origination risk. Finally, we conclude with five recommendations to the joint regulators. If you would like to read the full response on Docket <span class="caps">OCC</span>-2011-0002, click <a href="http://www.ad-co.com/pubs_docs/Public Letters/ADavidson_JointNPR_Response_06_16_2011.pdf">here</a>.</p> <p>As always, we welcome your comments and questions. You can post comments directly on our website, email <a href="mailto:support@ad-co.com">support@ad-co.com</a>, or call our New York office, 212-274-9075 for more information.</p></div> <div class="article-link"><a href="/newsletters/2011/Jul2011/Update_Jul11.pdf">Open this article...</a></div> </div> <div class="article"> <h4>New Tuning Recommendations for the AD&Co Prepayment Model by Dan Szakallas</h4> <div class="content"><p>Our tuning-parameter recommendations for Prepayment Model versions 5.2g and 5.2h have been updated this month. We updated the vintage-based tunings used within 5.2h in both the values and the dates where tunings fade out, and then updated 5.2g to closely match the results coming from 5.2h. Different factors contributed to the decision to update the tunings, which we shall discuss in this article and illustrate with some comparison charts.</p></div> <div class="article-link"><a href="/newsletters/2011/Jul2011/Prepayment_Jul11.pdf">Open this article...</a></div> </div> <div class="article"> <h4>Borrower's HPI: AD&Co to Create a Non-Distressed Index Combining FHFA and Radar Logic Data by Alex Levin</h4> <div class="content"><p>After a thorough analysis of the current trends in home price indices, AD&amp;Co has decided to construct and employ its own index of non-distressed prices using the usual Federal Housing Finance Agency (<span class="caps">FHFA</span>) purchase series, corrected for changes in the share of distressed transactions. To construct the index, AD&amp;Co will use the distressed (&#8220;motivated&#8221;) sales data collected and provided by Radar Logic. This article explains how we plan to accomplish that goal and the benefits of the new index.</p></div> <div class="article-link"><a href="/newsletters/2011/Jul2011/HPI_Jul11.pdf">Open this article...</a></div> </div> <div class="article"> <h4>Getting Risk Retention Right: Our Response to the Agencies by Eknath Belbase</h4> <div class="content"><p>Andrew Davidson &amp; Co., Inc. recently responded to the joint regulatory agencies request for public comment on the topic of &#8220;Credit Risk Retention&#8221; (<a href="http://www.ad-co.com/pubs_docs/Public Letters/ADavidson_JointNPR_Response_06_16_2011.pdf">Docket <span class="caps">OCC</span>-2011-0002</a>). In this Pipeline article, we describe the specific topics on which public comment was solicited, and summarize our response. Our response focused primarily on the parts of the proposal affecting residential mortgage-backed securitization. Interested readers can also follow this <a href="http://www.ad-co.com/pubs_docs/Public Letters/ADavidson_JointNPR_Response_06_16_2011.pdf">link</a> to read our full response.</p></div> <div class="article-link"><a href="/newsletters/2011/Jul2011/Strategy_Jul11.pdf">Open this article...</a></div> </div> Fri, 15 Jul 2011 18:20:23 -0400 http://www.ad-co.com/pubs_pipeline_archives?by_date=86 http://www.ad-co.com/pubs_pipeline_archives?by_date=86 <div class="article"> <h4>AD&Co’s 19th Annual Conference and Webinar Wrap-Up by Simone Davis</h4> <div class="content"><p><b>AD&amp;Co’s 19th Annual Conference – Remodeling the Housing Finance System: <br /> | Origination | Servicing | Securitization | Investment| </b></p> <p>Over 175 people have already registered for one of the premier industry events of the year. If you haven’t already done so, <a href="http://www.ad-co.com/forms/seminar_registration">register now</a> for AD&amp;Co’s 19th Annual Conference from 9am to 5pm on Thursday, June 9th at the TimesCenter in midtown Manhattan.</p> <p>We’ll discuss ways to use AD&amp;Co tools to renovate and repair housing finance in all phases of the loan cycle: Origination, Servicing, Structuring, and Investment. Company presentations and panel discussions with industry participants will explore the evolution and future of housing finance. With more exhibitors than last year, interactive guest speakers, and engaging panels this conference is expected to be our best to date.</p></div> <div class="article-link"><a href="/newsletters/2011/May2011/Update_May11.pdf">Open this article...</a></div> </div> <div class="article"> <h4>Assessing the Credit Profile of Proposed Qualifying Residential Mortgages by Richard Ellson, Ph. D., Will Searle, and Dan Szakallas</h4> <div class="content"><p>Section 15G of the Dodd-Frank Act stipulates that federal agencies (<span class="caps">OCC</span>, <span class="caps">FRB</span>, <span class="caps">FDIC</span>, <span class="caps">SEC</span>, and <span class="caps">FHFA</span>) issue regulations that require <span class="caps">ABS</span> securitizers to retain 5% of the securitized assets as a form of risk retention. The agencies are also required to provide an exemption to this retention, and in the case of home mortgages, the exemption applies to &#8220;Qualifying Residential Mortgages&#8221; (QRMs). The proposed <span class="caps">QRM</span> guidelines were released on March 29, 2011, and comments are due on June 10, 2011.</p></div> <div class="article-link"><a href="/newsletters/2011/May2011/Strategy_May11.pdf">Open this article...</a></div> </div> <div class="article"> <h4>The Explanatory Power of the OAS Method by Alex Levin</h4> <div class="content"><p>Last month&#8217;s article discussed what happened historically with the subprime <span class="caps">MBS</span> market and how the changes can be gauged by a measure called Credit <span class="caps">OAS</span>. We now switch our focus to the agency <span class="caps">MBS</span> market. Judging from interactions with AD&amp;Co&#8217;s users, it seems that the main question about agency-related valuation concerns Effective Duration. How good is AD&amp;Co&#8217;s model for producing sensible durations and hedge ratios for TBAs? For the reason explained below, I would like to re-phrase this inquiry: How good is AD&amp;Co&#8217;s model in predicting <span class="caps">TBA</span> moves?</p></div> <div class="article-link"><a href="/newsletters/2011/May2011/Valuation_May11.pdf">Open this article...</a></div> </div> Tue, 17 May 2011 14:15:33 -0400 http://www.ad-co.com/pubs_pipeline_archives?by_date=85 http://www.ad-co.com/pubs_pipeline_archives?by_date=85 <div class="article"> <h4>Recent Events, Releases, and a User Guide by Simone Davis</h4> <div class="content"><p>Last week, AD&amp;Co hosted “Life without the GSEs: A Proposal Emphasizing Private Capital” in Washington D.C. and met with some of the leading minds in the mortgage industry. Originators, regulators, investors, and servicers shared ideas and theories about the future of housing reform. A webinar held later in the week for those unable to attend the conference allowed for even more interaction and feedback. We hope these discussions will be the first of many focused on building a stronger foundation and eventually a more resilient housing market.</p></div> <div class="article-link"><a href="/newsletters/2011/Apr2011/Update_Apr11.pdf">Open this article...</a></div> </div> <div class="article"> <h4>Market and Rates Outlook: April 2011 by Eknath Belbase</h4> <div class="content"><p>The author would like to thank Rick Ellson for some valuable feedback in writing this article.</p> <p><b>Summary</b></p> <p>In our <a href="http://www.ad-co.com/pubs_pipeline_article/270">January</a> Strategy Corner, we discussed three sets of scenarios for three big picture issues affecting the housing and mortgage markets:&nbsp; In this article, we focus on the third issue&#8212;animal spirits and the revival of the larger economy&#8212;and see where we have come relative to expectations. Additionally, we consider implications on the interest rate outlook and risk management for the remainder of the year.</p></div> <div class="article-link"><a href="/newsletters/2011/Apr2011/Strategy_Apr11.pdf">Open this article...</a></div> </div> <div class="article"> <h4>Credit OAS: Where It Was and Where It Is by Alex Levin</h4> <div class="content"><p>The interest in the non-agency <span class="caps">MBS</span> market has surged recently, particularly as manifested by the well-publicized story of AIG&#8217;s Maiden Lane II portfolio, now in the possession of the Federal Reserve Bank. The objective valuation of that portfolio and many other non-agency <span class="caps">MBS</span> is a difficult task, given the complexity of required models and the scarcity of market data. Nevertheless, AD&amp;Co has established a method of valuing such instruments (&#8220;Credit <span class="caps">OAS</span>&#8221;) and gathered historical records that trace its application over the recent turbulent years. This article looks at a few key moments in the history and gauges where we were in the past and where we stand now.</p></div> <div class="article-link"><a href="/newsletters/2011/Apr2011/Valuation_Apr11.pdf">Open this article...</a></div> </div> Mon, 18 Apr 2011 14:42:42 -0400 http://www.ad-co.com/pubs_pipeline_archives?by_date=84 http://www.ad-co.com/pubs_pipeline_archives?by_date=84 <div class="article"> <h4>Full Speed Ahead! by Simone Davis</h4> <div class="content"><p>Warmer days are just around the corner and Andrew Davidson &amp; Co has a lot in store this spring. Earlier this week, we sent out a save-the-date email for our 19th Annual Conference. This year the conference will be held at The TimesCenter in New York City on <b>Thursday, June 9th, 2011</b>. Don’t forget to mark your calendars!</p> <p>During the month of April, AD&amp;Co invites you to join us to discuss the important questions affecting housing finance today with a live event in Washington D.C . on <b>Monday, April 11, 2011 at 2:00pm</b>. Register <a href="http://adco.wufoo.com/forms/andrew-davidson-co-inc-presents/">here</a> for the live event.</p> Topics will include: <p>• What would life be like without the GSEs?<br /> • What specific future role should the government play in the housing market?<br /> • What is the best way to minimize risk to the taxpayer of future bailouts while preserving the stabilizing benefits of a government role?<br /> • What steps can be taken immediately to begin the transition to a better private/public hybrid model for housing finance?</p> <p>For those unable to attend the live event in Washington D.C., AD&amp;Co will also host a live webinar on <b>Wednesday, April 13, 2011 at 2:00pm</b>. To register for the webinar, please <a href="http://www.ad-co.com/forms/seminar_registration2">register here</a>.</p></div> <div class="article-link"><a href="/newsletters/2011/Mar2011/Update_Mar11.pdf">Open this article...</a></div> </div> <div class="article"> <h4>Reforming Housing Finance: Time is of the Essence by Andrew Davidson, Eknath Belbase and Rick Ellson</h4> <div class="content"><p>Housing finance reform does not need to be just a philosophical debate about the future of the GSEs. There are concrete steps that can begin now to improve housing finance and test key ideas that underlie the philosophical arguments. In this article, we introduce and discuss one specific model for a hybrid private-public residential loan securitization market as articulated in the &#8220;third option&#8221; of the recently released Treasury report on housing finance reform. We show how our proposal preserves the important benefits of the existing system while mitigating disadvantages of government involvement, such as moral hazard, potential cost to the taxpayer, and the potential for politics to enter lending decisions. We believe that the restricted government involvement we propose would largely preserve the fixed-rate long-term prepayable mortgage, diversify sources of funding and securitization mechanisms (resulting in a more resilient system), and be relatively easy to transition to.</p></div> <div class="article-link"><a href="/newsletters/2011/Mar2011/Strategy_Mar11.pdf">Open this article...</a></div> </div> <div class="article"> <h4>The 2010 Q4 HPI Data: Is it a False Signal? by Alex Levin</h4> <div class="content"><p>February-end was the time to re-initialize our <span class="caps">HPA</span> conditions to the newly available Q4 data and to update our Housing Price Index (<span class="caps">HPI</span>) outlook, among other things. Most commonly, this internal process works without the need for human interference: We go with the math. Occasionally, we have to step into the process. This happens when we strongly suspect that the recent data is caused by reasons not related to our <span class="caps">HPI</span>/<span class="caps">HPA</span> modeling framework.</p></div> <div class="article-link"><a href="/newsletters/2011/Mar2011/HPI_Mar11.pdf">Open this article...</a></div> </div> <div class="article"> <h4>A Look at Foreclosure Timelines by Sanjeeban Chatterjee</h4> <div class="content"><p>Foreclosures have become an integral part of the housing finance dialogue ever since the crisis started. Last year was a particularly bad year, with media coverage about robo-signers (bank officers signing foreclosure documents without having a thorough knowledge about each case), and states trying to curb abuses. This led to moratoriums on foreclosure proceedings, with banks and servicers delaying action to make sure that protocols were being followed. But how is all this impacting the actual time it takes to complete the foreclosure process?</p></div> <div class="article-link"><a href="/newsletters/2011/Mar2011/Credit_Mar11.pdf">Open this article...</a></div> </div> Fri, 11 Mar 2011 15:39:53 -0500 http://www.ad-co.com/pubs_pipeline_archives?by_date=83 http://www.ad-co.com/pubs_pipeline_archives?by_date=83 <div class="article"> <h4>Sequoia Mortgage Trust 2011-1: Rating Agency, Credit, and Pricing Issues by Richard Ellson, Ph.D. and William Searle</h4> <div class="content"><p>On February 18, there was a new non-agency <span class="caps">RMBS</span> transaction priced—SEMT 2011-1 with Redwood Trust as the sponsor. This represents both the second <span class="caps">SEMT</span> transaction and the second market transaction utilizing newly originated prime loans since the end of 2009. <span class="caps">SEMT</span> 2011-1 is sized at $290.4 million, and <span class="caps">SEMT</span> 2010-H1 was $222.4 million—barely $500 million in new non-agency <span class="caps">RMBS</span> issuance which is rather pathetic by historical standards.</p></div> <div class="article-link"><a href="/newsletters/2011/Feb2011/Special_Feb11.pdf">Open this article...</a></div> </div> <div class="article"> <h4>Spring... Is that you? by Simone Davis</h4> <div class="content"><p>With only 30 days of winter left, we can begin to imagine what spring will be like. At the same time, the Obama administration’s <a href="http://www.treasury.gov/initiatives/Documents/Reforming%20America's%20Housing%20Finance%20Market.pdf">recent recommendation</a> to eliminate Fannie and Freddie has us imagining the future of the mortgage market without GSEs: See our new Strategy Corner <a href="http://www.ad-co.com/pubs_pipeline_article/272">article</a> for our view. Please feel free to express theories of your own using our <a href="http://www.ad-co.com/pubs_pipeline_article/272">comments</a> feature. Remember, submissions will <u>not</u> be shared publicly.</p> <p><b>New Models – Beta and Beyond!</b></p> <p>AD&amp;Co has released new beta versions of our Prepayment Model, version 5.2h beta and LoanDynamics™ Model version 1.9 beta. The main change in v5.2h beta and v1.9 beta is the introduction of file-based tuning. In an effort to expedite the model setup process, we have implemented the current AD&amp;Co tuning recommendations in a pair of text files that are automatically read in and used during model run. Please contact Cody Stenberg, <a href="mailto:cody@ad-co.com">cody@ad-co.com</a>, if you would like to obtain either of the new beta models or if you have any questions.</p> <p>In addition, RiskProfiler™ v3.2.7 along with Credit <span class="caps">OAS</span> v8.8 and RiskProfiler™ v3.2.8 along with Credit <span class="caps">OAS</span> v8.8.3 were released in the month January alone! If you would like to obtain one of these new versions of <span class="caps">OAS</span> or RiskProfiler™ or if you have any questions, please contact Rashad Ladson, <a href="mailto:rashad@ad-co.com">rashad@ad-co.com</a>.</p> <p><b>Don’t forget to mark your calendars: The date for AD&amp;Co’s 19th Annual Conference is set. </b></p> <p>The annual conference will be held at the TimesCenter located in Theater District of New York City on Thursday, June 9th, 2011.</p></div> <div class="article-link"><a href="/newsletters/2011/Feb2011/Update_Feb11.pdf">Open this article...</a></div> </div> <div class="article"> <h4>IMAGINING NO GSEs: The Potential Impact of Dismantling <br> Fannie and Freddie by Andrew Davidson and Eknath Belbase</h4> <div class="content"><p>The White House is due to present a resolution regarding <span class="caps">FNMA</span> and Freddie Mac&#8217;s status, according to media reports, by February 11, in the form of a specific proposal or a series of options. In this strategy corner, we address the most extreme of the proposed options (typically supported by the political right): The complete dismantling of Fannie and Freddie with no government presence in the mortgage business, aside from the &#8220;traditional&#8221; Federal Housing Administration (<span class="caps">FHA</span>) role of serving underrepresented lower-income first-time home buyers using extremely strong underwriting standards. In light of that scenario, we try to imagine a U.S. mortgage market without Fannie and Freddie, and to answer some questions about it.</p></div> <div class="article-link"><a href="/newsletters/2011/Feb2011/Strategy2_Feb11.pdf">Open this article...</a></div> </div> <div class="article"> <h4>The Term Structure Modeling Choices Revisited… And Reminded by Alex Levin</h4> <div class="content"><p>My first research paper published on behalf of Andrew Davidson &amp; Co., Inc. (AD&amp;Co) was on the subject of &#8220;conscientious choice&#8221; in selecting interest-rate models. First produced in AD&amp;Co&#8217;s Quantitative Perspectives series in 2002, it was subsequently published by the Journal of Portfolio Management in 2004. Even now, talking to some users of our models, I occasionally hear, &#8220;Oh, we know, you recommend using the Hull-White model&#8221; and it sounds like a reminder to myself. It is not an eternal wisdom, of course, and needs to be monitored against trends in interest rates and trading indicators.</p></div> <div class="article-link"><a href="/newsletters/2011/Feb2011/Valuation_Feb11.pdf">Open this article...</a></div> </div> <div class="article"> <h4>Standardizing Credit Ratings: The Trade-Offs Between Further Regulating Ratings and Investor Due Diligence by Andrew Davidson and Eknath Belbase</h4> <div class="content"><p>In early February, Andrew Davidson &amp; Co., Inc. responded to the Securities and Exchange Commission&#8217;s (<span class="caps">SEC</span>) request for public comment on the topic of &#8220;Feasibility and Desirability of Standardizing Credit Ratings Terminology.&#8221; This request for public comment focused on whether it was feasible or desirable to standardize the terminology used for credit ratings across ratings agencies, categories of rated debt (corporate, municipal, structured finance, etc.) as well as debt maturities (because shorter-dated money-market type debt instruments have an alternative nomenclature and ratings process). Additionally, the <span class="caps">SEC</span> wanted comments from the public on mapping ratings to particular quantitative analytical measures, such as expected default/loss or probability of default. The comments were requested as part of a study mandated by the Dodd-Frank legislation in a section of the bill addressing ratings reform.</p></div> <div class="article-link"><a href="/newsletters/2011/Feb2011/Strategy_Feb11.pdf">Open this article...</a></div> </div> Fri, 11 Feb 2011 17:42:56 -0500 http://www.ad-co.com/pubs_pipeline_archives?by_date=82 http://www.ad-co.com/pubs_pipeline_archives?by_date=82 <div class="article"> <h4>Meet us in Orlando for ASF 2011! by Simone Davis</h4> <div class="content"><p>Happy New Year and welcome to the first issue of the Pipeline for 2011.</p> <p>Preparations for <span class="caps">ASF</span> 2011 are underway and we are looking forward to meeting with all interested parties at our booth in the exhibition hall. To schedule a demo or a private meeting to discuss our products and services, please contact Rob Landauer, Director of Business Development, at your earliest convenience to arrange a meeting (<a href="mailto:rob@ad-co.com">rob@ad-co.com</a>).</p> <p>Please check out our new<a href="http://www.ad-co.com/vectors_manuals_tutorials_guides"> video tutorial</a> of the LoanDynamics™ Model v1.9Beta now available on our website. You will need a login and password to access this feature. To learn more about the beta release of LoanDynamics™ v1.9, read <a href="http://www.ad-co.com/pubs_pipeline_article/265"> December’s Pipeline </a>article.</p> <p><b>New model license keys are on the way!</b></p> <p>Your current keys will expire at the end of January and need to be replaced with a new key. Next week, we will begin sending email notifications announcing the release of the new license keys which will be available for download through the My AD&amp;Co portal on our website. If you do not receive an email from us by <b>Monday, January 24, 2011</b>, please contact Cody, <a href="mailto:cody@ad-co.com">cody@ad-co.com</a> or Simone, <a href="mailto:Simone@ad-co.com">simone@ad-co.com</a>.</p> <p>See you in Florida!</p> <p><b>We are currently accepting topic submissions for Pipeline articles. If there are topics that you feel AD&amp;Co should cover, submit them <a href="http://www.ad-co.com/pubs_pipeline_article/271">here.</a></b></p> <p>If you have any questions or comments, please interact with us using the comment option below.</p> <p><b><span class="caps">NOTE</span>:</b> <em>Submissions will not be shared publicly.</em></p></div> <div class="article-link"><a href="/newsletters/2011/Jan2011/Update_Jan11.pdf">Open this article...</a></div> </div> <div class="article"> <h4>New Delinquency Disclosures from Freddie Mac by Dan Szakallas</h4> <div class="content"><p>Beginning this month, Freddie Mac is providing pool-level delinquency disclosures for their single-family Mortgage Participation Certificate (PC) and Giant PC securities (read the press release <a href="http://www.freddiemac.com/news/archives/mbs/2010/20101207_pool_level_disclosure.html">here</a>). This is a very important development because it will allow investors to better understand the default risk of the PCs that they own. (While PC investors don&#8217;t bear the risk of loss from default, defaults and buyouts of delinquent loans can affect the timing of principal payments.) Freddie Mac will be providing the unpaid balance (<span class="caps">UPB</span>) and loan count of each pool that falls into four different buckets: 30-59 days delinquent, 60-89 days delinquent, 90-119 days delinquent, and 120 days or more delinquent, as well as the balance and loan count of seriously delinquent loans repurchased by Freddie Mac each month.</p></div> <div class="article-link"><a href="/newsletters/2011/Jan2011/Prepayment_Jan11.pdf">Open this article...</a></div> </div> <div class="article"> <h4>The Hunt for Duration… Continued by Alex Levin</h4> <div class="content"><p>If I were to rank clients&#8217; inquires by their frequency, the questions on effective duration of <span class="caps">MBS</span> would top the list. I dedicated two Pipeline articles solely to this topic in <a href="http://www.ad-co.com/pubs_pipeline_article/20">March of 2007</a> and <a href="http://www.ad-co.com/pubs_pipeline_article/243">April of 2010</a>. Given the market environment, we have had more requests to explain certain effects influencing the effective duration measure (aka option-adjusted duration or <span class="caps">OAD</span>):</p> <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1. Why are the Ginnies materially “shorter” than the Fannies?</p> <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2. How does volatility affect <span class="caps">OAD</span>?</p> <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;3. Are AD&amp;Co’s OADs in line with the market?</p></div> <div class="article-link"><a href="/newsletters/2011/Jan2011/Valuation_Jan11.pdf">Open this article...</a></div> </div> <div class="article"> <h4>Outlook for 2011 by Eknath Belbase</h4> <div class="content"><p>In this strategy corner, we discuss several big picture mortgage market issues which we believe might begin to resolve this year; and even if they are not completely resolved, we should start to get a much clearer picture of their direction. We also discuss some possible scenarios for each issue, the relationships between issues and strategy implications. Our topics are: (1) the approximately $1.6 trillion dollar government-sponsored enterprise (<span class="caps">GSE</span>) retained portfolios and their shrinkage (2) the <span class="caps">GSE</span> conforming loan limit and (3) the revival of animal spirits in the housing market and broader economy.</p></div> <div class="article-link"><a href="/newsletters/2011/Jan2011/Strategy_Jan11.pdf">Open this article...</a></div> </div> Fri, 14 Jan 2011 12:47:34 -0500 http://www.ad-co.com/pubs_pipeline_archives?by_date=81 http://www.ad-co.com/pubs_pipeline_archives?by_date=81 <div class="article"> <h4>Happy Holidays! by Rob Landauer</h4> <div class="content"><p>Welcome to the final issue of the Pipeline for 2010. AD&amp;Co would like to take this opportunity to wish all of our clients, partners and friends a very happy and healthy holiday season. We look forward to working with you in 2011 to find new and creative solutions to the risk management and valuation issues that continue to surround the <span class="caps">RMBS</span> market. We greatly appreciate the confidence our clients have shown in our products and services this year and promise to continue to work tirelessly to maintain your trust in 2011 and beyond. As we enter the New Year, we are cautiously optimistic that distress will be replaced by improvement and uncertainty with productive initiatives to move the <span class="caps">RMBS</span> market forward.</p></div> <div class="article-link"><a href="/newsletters/2010/Dec2010/Update_Dec2010.pdf">Open this article...</a></div> </div> <div class="article"> <h4>LoanDynamics™ Model v1.9beta by Sanjeeban Chatterjee and Daniel Swanson</h4> <div class="content"><p>Andrew Davidson &amp; Co., Inc. (AD&amp;Co) is pleased to release a new version of the LoanDynamics™ Model (<span class="caps">LDM</span> v1.9beta) with the following new features:</p> <p>1. There is a new model for the Current-to-Terminated (CT) transition.<br /> 2. All non-CT transitions have been re-tuned using data through September 2010.<br /> 3. The model has tunings for expected loan modifications.<br /> 4. Tuning parameters are now read from a tuning file.<br /> 5. All delinquencies are set using the <span class="caps">MBA</span> method of calculating delinquency.</p> <p>Open article for more details.</p></div> <div class="article-link"><a href="/newsletters/2010/Dec2010/Credit_Dec2010.pdf">Open this article...</a></div> </div> <div class="article"> <h4>New Home Price Outlook: Show Me the Interest Rates by Alex Levin</h4> <div class="content"><p>With each release of the Federal Housing Finance Agency (<span class="caps">FHFA</span>) home price data or a major shift in interest rates, Andrew Davidson &amp;Co., Inc. updates its Home Price Index (<span class="caps">HPI</span>) forecast. In November, the two events happened concurrently: <span class="caps">FHFA</span> and Standard and Poors (S&amp;P) released (mostly frustrating) <span class="caps">HPI</span> data for Q3 whereas the current coupon surged 40 basis points (bps). Which of them has the largest impact on our <span class="caps">HPI</span> outlook? Did we expect the bad news? What is our <span class="caps">HPI</span> outlook for 2011? Read this article to assess the role of different market factors in our <span class="caps">HPI</span> modeling work.</p></div> <div class="article-link"><a href="/newsletters/2010/Dec2010/HPI_Dec2010.pdf">Open this article...</a></div> </div> <div class="article"> <h4>Introduction to Basel III by Eknath Belbase</h4> <div class="content"><p>Andrew Davidson &amp; Co., Inc. recently submitted a response letter to the request for public comment on the Basel <span class="caps">III</span> capital requirements will be completely implemented by 2019, with some provisions becoming fully effective several years prior to that date. Significant transitions will ramp-up beginning in 2013. In this Strategy Corner, we provide a general overview of the main provisions of Basel <span class="caps">III</span>. Since provisions and details may be modified by regulators for U.S.-based banks we plan to provide more specific analyses including strategy implications over the course of 2011-12, as more details become apparent.</p></div> <div class="article-link"><a href="/newsletters/2010/Dec2010/Strategy_Dec2010.pdf">Open this article...</a></div> </div> Tue, 21 Dec 2010 12:41:16 -0500 http://www.ad-co.com/pubs_pipeline_archives?by_date=80 http://www.ad-co.com/pubs_pipeline_archives?by_date=80 <div class="article"> <h4>Pipeline Updates by Laura Gridley</h4> <div class="content"><p><b>Strategy Corner Now a Regular Feature in <em>the Pipeline</em></b></p> <p>We recently announced the <b><a href="http://www.ad-co.com/about_press_releases">Strategy Corner</a></b> — a new monthly feature in the Pipeline, offering strategy-based research papers to help you better manage risk and take advantage of emerging mortgage market and regulatory trends. The Strategy Corner is authored by AD&amp;Co&#8217;s credit and market analysts, professionals at the top of their field who are directly involved in helping to manage problems and challenges in the mortgage industry.</p> <p>Check out this month&#8217;s edition, &#8220;Alternative Approaches to Eliminating the Reliance on Ratings for Risk-Based Capital: Why a Multi-Scenario Cash Flow Based Analytical Methodology is Best&#8221; and join us for a complimentary <a href="https://www1.gotomeeting.com/register/997470944">webinar discussion</a> on the topic next Tuesday, November 9th, 2010 from 1:00pm-2:00pm <span class="caps">EST</span>. The discussion will include an examination of concentration ratios, the Basel II supervisory formula for securitization exposures, as well as AD&amp;Co&#8217;s recommended multi-scenario cash flow generation-based expected shortfall approach. Please <a href="https://www1.gotomeeting.com/register/997470944">click here</a> to register for the webinar.</p> <p>As always, we appreciate your feedback and encourage you to send us <a href="http://www.ad-co.com/pubs_pipeline_article/262">suggestions</a> for future Strategy Corner articles.</p> <p><b><em>the Pipeline</em> Now Requires a Subscription and a Login</b></p> <p>We are pleased to continue to offer the <em>Pipeline</em> free of charge to our clients and friends, but now require a subscription and a password to access the articles. If you don&#8217;t already have a login for AD&amp;Co&#8217;s website and would like to continue receiving <em>the Pipeline</em>, kindly fill out the request form and we will send you instructions to set up a user name and password so that you may access this month&#8217;s articles and continue to read AD&amp;Co&#8217;s newsletter each month. We appreciate your continued interest.</p> <p><a href="http://customer.ad-co.com/welcome/demo_request">Sign up</a> to continue receiving your free subscription.</p> <p>Questions or comments? Please contact us at <a href="mailto:support@ad-co.com?subject=Pipeline%20Support">support@ad-co.com</a>.</p></div> <div class="article-link"><a href="/newsletters/2010/Nov2010/Update_Nov2010.pdf">Open this article...</a></div> </div> <div class="article"> <h4>Alternative Approaches to Eliminating Reliance on Ratings for Risk-Based Capital: Why a Multi-Scenario Cash Flow Based Analytical Methodology is Best by Eknath Belbase and Will Searle</h4> <div class="content"><p>Andrew Davidson &amp; Co., Inc. recently submitted a response letter to the request for public comment on the Risk-Based Capital Guidelines of the Federal Banking Agencies (on alternatives to the use of credit ratings). This request was an outcome of the Dodd-Frank reform bill, which requires regulators to reduce their reliance on ratings agencies.</p> <p>In this strategy corner, we continue last month’s general introduction to Risk-Based Capital (<span class="caps">RBC</span>) with a comparison of some specific methods of assigning risk-based capital to credit-sensitive mortgage securities, and introduce our preferred approach. Interested readers may find the full text of our <a href="http://www.ad-co.com/pubs_docs/Public%20Letters/DAVIDSON_R-1391.pdf">response letter</a> on our web site. Additionally, readers who missed our <a href="http://www.ad-co.com/pubs_pipeline_article/258">October article</a> on the definition of <span class="caps">RBC</span> and general approaches can find that article on our web site.</p></div> <div class="article-link"><a href="/newsletters/2010/Nov2010/Strategy_Nov2010.pdf">Open this article...</a></div> </div> <div class="article"> <h4>Agency Prepayments: Where Will They Come From? by Dan Szakallas</h4> <div class="content"><p>For the past few months, we have watched as mortgage rates fell to never-before-seen levels. For both borrowers and investors, benchmark rates are lower than they have ever been. On 10/7/10, the <span class="caps">FNMA</span> 30YR Mortgage Current Coupon (<span class="caps">MTGEFNCL</span>) rate fell to 3.21%, while the Freddie Mac Primary Mortgage Market Survey (<span class="caps">PMMS</span>) reported an average rate of 4.19% for the week of 10/14/10. From late April through the end of August, the <span class="caps">MTGEFNCL</span> fell by 100 basis points, while the <span class="caps">PMMS</span> fell by 75 basis points. Over the past two months, both indices have maintained their levels from late August, causing many mortgage market participants to believe that prepayments will continue to rise because of this additional interest rate incentive. However, at Andrew Davidson &amp; Co., Inc., we believe that there are other circumstances in play that will prevent any type of “refi wave” from occurring.</p></div> <div class="article-link"><a href="/newsletters/2010/Nov2010/Prepayment_Nov2010.pdf">Open this article...</a></div> </div> Thu, 04 Nov 2010 13:48:36 -0400 http://www.ad-co.com/pubs_pipeline_archives?by_date=79 http://www.ad-co.com/pubs_pipeline_archives?by_date=79 <div class="article"> <h4>Alternatives to the Use of Ratings in RBC Guidelines: Upcoming ANPR Response by Eknath Belbase</h4> <div class="content"><p>Andrew Davidson &amp; Co., Inc. is submitting a formal public response to the Advance Notice of Proposed Rulemaking Regarding Alternatives to the Use of Credit Ratings in the Risk-Based Capital Guidelines of the Federal Banking Agencies. In this Pipeline article, we summarize the general portion of our response. Readers interested in our full response, including our analysis of particular securities, will be directed to it later in October.</p></div> <div class="article-link"><a href="/newsletters/2010/Oct2010/Strategy_Oct2010.pdf">Open this article...</a></div> </div> <div class="article"> <h4>Preview: Using RiskProfiler™ to Assess and Classify Short-Term Portfolio Risk by Alex Levin</h4> <div class="content"><p>The upcoming version of RiskProfiler™ (Andrew Davidson &amp; Co., Inc.&#8217;s <span class="caps">MBS</span> valuation and risk measurement platform) features a tool that allows users to specify short-term risks across a range of factors; i.e., to measure exposures and aggregate results for each instrument, a particular strategy, or for an entire portfolio. Aside from the total risk, the system will compute and report its constituent components, called &#8220;Rate Risk,&#8221; &#8220;Credit Risk,&#8221; &#8220;Prepay Risk,&#8221; and &#8220;Spread Risk.&#8221;</p></div> <div class="article-link"><a href="/newsletters/2010/Oct2010/Valuation_Oct2010.pdf">Open this article...</a></div> </div> <div class="article"> <h4>New Recommended Prepayment Model Tunings by Dan Szakallas</h4> <div class="content"><p><b>Important: Please note that in the initial release of the tuning parameters there were some typos for FNMA15, FHLMC15, NAPrime_30 and Subprime_30 for Prepayment model versions 5.2f &#8211; 5.2g. Please visit the <a href="http://www.ad-co.com/vectors_tuning_memos/vectors_tuning_memo_pp5.2f-g_0910">following link</a> to make sure you are using the correct tuning values. We apologize for any inconvenience.</b></p> <p><strong>Andrew Davidson &amp; Co., Inc.</strong> has released updated tuning parameter recommendations for several different versions of the prepayment model. We have been monitoring market activity and prepayment model performance and have observed that the recent drop in secondary mortgage rates (current coupon rates from Bloomberg) has caused many models to accelerate prepayment forecasts to levels that are not actually being observed. Additionally, with secondary rates below 5% for well over 18 months, the pool of borrowers still actively looking to refinance has dwindled noticeably. The spread between the actual borrower rate and the secondary rate continues to be an issue as well, as the <span class="caps">MTGEFNCL</span> has dropped as low as 3.29%, but the average actual rate available to borrowers for a 30YR fixed-rate loan has not really dropped below 4.30%. The updated set of tunings values are designed to address these issues.</p></div> <div class="article-link"><a href="/newsletters/2010/Oct2010/Prepayment_Oct2010.pdf">Open this article...</a></div> </div> Wed, 13 Oct 2010 13:29:35 -0400 http://www.ad-co.com/pubs_pipeline_archives?by_date=78 http://www.ad-co.com/pubs_pipeline_archives?by_date=78 <div class="article"> <h4>Vendor Spotlight: Where to Find AD&Co’s LoanDynamics™ Model by Laura Gridley</h4> <div class="content"><p>Compass Analytics | FactSet | <span class="caps">INTEX</span> | PolyPaths | <span class="caps">QRM</span> | RiskSpan</p> <p>AD&amp;Co’s LoanDynamics™ Model was developed to help investors and issuers better understand credit and prepayment characteristics of credit sensitive mortgage loans and securities. Using historical data and user-driven scenarios for interest rate and house price indices, the LoanDynamics™ Model forecasts how borrowers are likely to behave by providing key investor performance metrics such as <span class="caps">CRR</span> (repayment), <span class="caps">CDR</span> (default), 60+ delinquency and the probability and magnitude of loss.</p> <p>The LoanDynamics™ Model is available for use through proprietary internal risk management, pricing or valuation systems, and through RiskProfiler™, AD&amp;Co’s own widely used valuation and risk measurement solution. In addition, AD&amp;Co has formed strategic partnerships with the following leading risk management and portfolio analysis systems to allow users to seamlessly tap into the power of the LoanDynamics™ Model, further facilitating the analysis of credit sensitive <span class="caps">MBS</span>.</p></div> <div class="article-link"><a href="/newsletters/2010/Sep2010/Update_Sep2010.pdf">Open this article...</a></div> </div> <div class="article"> <h4>AD&Co's New HPI Forecasts and Tuning Recommendations by Alex Levin</h4> <div class="content"><p>With the recent 2010Q2 release of the <span class="caps">FHFA</span> <span class="caps">HPI</span> data, AD&amp;Co is in position to update its <span class="caps">HPI</span> forecasts. This time, it was a more challenging exercise than usual. The optimism inferred from this release could be exaggerated as many analysts (including ourselves) attribute the numbers to the recently expired homebuyer tax credit (April 30 was the deadline to enter a contract). We are quite confident that Congress will extend the benefit, but the rush to buy was evident in the sizable drop in transactions in recent months. In recognition of this anomaly (“observed external force”), we recommend temporarily tuning the HPI2 model. This article explains our approach.</p></div> <div class="article-link"><a href="/newsletters/2010/Sep2010/HPI_Sep2010.pdf">Open this article...</a></div> </div> <div class="article"> <h4>Loan Modifications and Transitions Rates by Sanjeeban Chatterjee</h4> <div class="content"><p>These days we are seeing a lot of media reports about loan modification programs. These programs are typically available to borrowers who are either delinquent, or are having financial difficulties and may become delinquent.</p> <p>Based on what we know so far, it seems that the success rate is lower than what people were expecting. This is mainly because borrowers are dropping out during the trial modification period. This could be due to documentation requirements, not meeting the <span class="caps">DTI</span> or income requirements, or a variety of other factors. However, for loans that have been permanently modified, we find some encouraging trends.</p></div> <div class="article-link"><a href="/newsletters/2010/Sep2010/Credit_Sep2010.pdf">Open this article...</a></div> </div> <div class="article"> <h4>The Composition of the Mortgage Finance Market and the Consequences for Reform by Andrew Davidson</h4> <div class="content"><p>There are roughly ten trillion dollars worth of mortgages outstanding in the U.S. During any single year, homeowners borrow two to three trillion dollars to finance their homes. At the risk of stating the obvious: These are big numbers.</p> <p>The purpose of the housing finance system is to provide funding for these loans. Using 2006, a pre-crisis year as a basis, we can get a general picture of the market. Of all the loans outstanding in that year, 65% (5% <span class="caps">GNMA</span>, 25% Fannie/Freddie <span class="caps">MBS</span>, 15% Fannie/Freddie Retained Portfolio and 20% private label securities) were securitized. The remaining 35% were in whole loan, non-securitized form.</p></div> <div class="article-link"><a href="/newsletters/2010/Sep2010/Strategy_Sep2010.pdf">Open this article...</a></div> </div> <div class="article"> <h4>Origination Risk in the Mortgage Securitization Process: An Analysis of Alternate Policies by Andrew Davidson and Eknath Belbase</h4> <div class="content"><p>In this policy paper, we examine three approaches to containing origination risk in <span class="caps">MBS</span>: skin-in-the-game, reps-and-warranties and a concept we introduce called an origination certificate. We evaluate these policy options using the criteria of cost, effectiveness, and robustness to securitization models and benefits to borrowers. Skin-in-the-game, which is perhaps the easiest policy to implement, appears to be the least useful. The traditional reps-and-warrants approach works for the GSEs but is not robust to other forms of non-agency securitization. The origination certificate approach has the potential to be the most effective across a range of securitization models but would require the greatest set-up costs.</p></div> <div class="article-link"><a href="/newsletters/2010/Sep2010/Strategy2_Sep2010.pdf">Open this article...</a></div> </div> <div class="article"> <h4>Using Scenario Analysis in Uncertain Times by Eknath Belbase</h4> <div class="content"><p>On August 10th, the Federal Reserve announced that it would be reinvesting principal paydowns on its considerable portfolio of <span class="caps">MBS</span> into treasuries. Prior to this announcement, the plan had been to not reinvest paydowns, effectively shrinking the Fed’s $2 trillion securities balance sheet. The announcement means that the money supply will grow faster by a level equal to the scheduled and unscheduled principal paydown balance on the approximately $1.1 trillion of agency <span class="caps">MBS</span> holdings. (See Table 1 in article for summary August 25, 2010 system open market holdings).</p></div> <div class="article-link"><a href="/newsletters/2010/Sep2010/Strategy3_Sep2010.pdf">Open this article...</a></div> </div> Tue, 14 Sep 2010 10:32:07 -0400 http://www.ad-co.com/pubs_pipeline_archives?by_date=77 http://www.ad-co.com/pubs_pipeline_archives?by_date=77 <div class="article"> <h4>2010 Conference Recap; Video Tutorials Now Available for AD&Co’s LoanDynamics™ Model by Rob Landauer</h4> <div class="content"><p><b>2010 Conference Recap</b></p> <p>Thank you once again to all who joined us for AD&amp;Co’s 18th Annual Conference, “A New Decade, A New Dawn” this year in New York City. While it is clear that there are still challenges to overcome and major decisions about regulations and industry infrastructure to be made, we were thrilled to gather with over 240 dedicated mortgage professionals to help explore opportunities that a revamped and revitalized industry present. (Continued)</p> <p><b>Video Tutorials Now Available for AD&amp;Co’s LoanDynamics™ Model</b></p> <p>AD&amp;Co has expanded its user support resources with the addition of on-line video tutorials for the LoanDynamics™ Model, its premier credit solution for your mortgage portfolio. The easy-to-follow videos help you get started more quickly and help you find the answers you need to operate the model correctly. Each tutorial focuses on a specific feature so you can master its operation. The video library includes the following tutorials and can be accessed from the Vectors™ Support drop-down menu (User Manuals) on our website.</p></div> <div class="article-link"><a href="/newsletters/2010/Jul2010/Update_Jul2010.pdf">Open this article...</a></div> </div> <div class="article"> <h4>New in AD&Co’s HPI2 Model: Geographical Localizer by Alex Levin</h4> <div class="content"><p>When modeling the future behavior of borrowers, should one use <span class="caps">MSA</span>-level home price scenarios or will a single (“national”) home price index suffice? To localize or not to localize? Intuitively, most credit analysts will vote for full geographical model thinking: “The more &#8211; the better”. Whereas our research confirms that a single-index home price view is insufficient for accurate <span class="caps">MBS</span> credit analyses, not every form of geographical modeling yields reliable results.</p></div> <div class="article-link"><a href="/newsletters/2010/Jul2010/HPI_Jul2010.pdf">Open this article...</a></div> </div> <div class="article"> <h4>Current-to-Termination Model for the LoanDynamics™ Model by Dan Szakallas</h4> <div class="content"><p>The upcoming beta release of AD&amp;Co’s LoanDynamics™ Model includes a new methodology for estimating the current (&#67;) to terminated (T) transition (CtoT), which represents the voluntary prepayment portion of the overall transition model. We have modified the way the model handles loan origination characteristics in determining not only the proper parameter set to be called, but also in the way that the forecasted prepayment response curve (S-curve) is built. We have also attempted to address the challenges of building a model that can perform well retrospectively before and during the crisis period, as well as produce reliable forecasts as we move forward into a new time of period or mortgage origination and securitization.</p></div> <div class="article-link"><a href="/newsletters/2010/Jul2010/Prepayment_Jul2010.pdf">Open this article...</a></div> </div> Wed, 14 Jul 2010 13:37:32 -0400 http://www.ad-co.com/pubs_pipeline_archives?by_date=76 http://www.ad-co.com/pubs_pipeline_archives?by_date=76 <div class="article"> <h4>AD&Co's 18th Annual Conference 2010: A New Decade, A New Dawn by Rob Landauer</h4> <div class="content"><p>Over 150 people have already registered for one of the premier industry events of the year. If you haven’t already done so, <a href="http://www.ad-co.com/survey/18th_annual_conference">register now<a/> for AD&amp;Co’s 18th Annual Conference from 9am to 5pm on Wednesday June 9th at the TimesCenter in midtown Manhattan. The morning sessions will focus on the impact the crisis period and new landscape will have on our prepayment, credit and valuation models. The afternoon sessions will take a deep dive into the tools, analyses and considerations investors, risk managers, and originators need to be cognizant of as the mortgage market emerges from turmoil to a new normalcy. For a more detailed agenda, <a href="http://ad-co.com/about_news_and_events">please click here</a>. Don’t wait to register as space is limited. We look forward to seeing our clients, colleagues and friends at this year’s event.</p> <p>In this issue of the Pipeline, we are pleased to introduce a new section, the Strategy Corner. Articles in this section will provide actionable insights that will help our clients better manage risk and take advantage of emerging market and regulatory trends. These articles will be authored by our credit and market analysts who are directly involved in the problems and challenges faced by our client base. In this issue, we take a close look at the collateral characteristics of the first non-agency securitization in two years, <span class="caps">SEMT</span> 2010-H1, discuss the consequences of hedging or not hedging an <span class="caps">MBS</span> portfolio as the yield curve flattens, and analyze the implications that principal forgiveness modifications will have on security performance. Please do not hesitate to contact the authors directly for more information or for ideas as to how to apply these strategies to your firm.</p></div> </div> <div class="article"> <h4>Quantitative Measures of Risk and Ratings: Evaluating SEMT 2010-H1 Versus Prime and Benchmark Pools by Richard Ellson, Ph.D. and William Searle</h4> <div class="content"><p><b>Introduction</b></p> <p>On April 23, 2010 the first non-agency <span class="caps">RMBS</span> securitization in two years was priced: <span class="caps">SEMT</span> 2010-H1 ($222.378 million). The original price talk on the senior tranche was a 4% coupon, but this tranche was oversubscribed at 5:1. The final pricing was a par 3.75% coupon, and it was still oversubscribed at approximately 2.5:1. The junior securities and an IO strip were retained by Redwood Trust, a <span class="caps">REIT</span> who was the sponsor of the deal.</p></div> <div class="article-link"><a href="/newsletters/2010/May2010/StrategyCredit_May10.pdf">Open this article...</a></div> </div> <div class="article"> <h4>Analyzing the Impact of Principal Forgiveness Mods by Eknath Belbase and Daniel Swanson</h4> <div class="content"><p>Bank of America recently announced a new type of principal forgiveness modification program for underwater borrowers. In contrast to prior programs, which have tended to focus on reducing payments via coupon reduction or term extension, this program rewards underwater borrowers who continue to make payments by forbearing the amount by which they are underwater (the $ amount of the negative equity) and forgiving it in stages as they reach certain on-time payment milestones. By the end of 5 years, an underwater borrower who continues to make payments on an amortizing loan can expect to have positive equity.</p></div> <div class="article-link"><a href="/newsletters/2010/May2010/StrategyReg_May10.pdf">Open this article...</a></div> </div> <div class="article"> <h4>Beware the Bear Flattener by Eknath Belbase</h4> <div class="content"><p>The 10-year treasury has risen almost 150 bps from its late 2008 distressed lows in yield, briefly touching the 4.00% yield level in April. Meanwhile, recent employment statistics finally show some job growth. Given that the Fed may begin raising rates in the next quarter or two and therefore flattening the curve, it is important to evaluate the impact of different back-up scenarios on hedged and un-hedged mortgage portfolios. In this article we look at Fed tightening cycles since 1993 to help formulate some possible scenarios, and then evaluate the hedged and un-hedged performance of a range of agency mortgage securities in those scenarios.</p></div> <div class="article-link"><a href="/newsletters/2010/May2010/StrategyIRs_May10.pdf">Open this article...</a></div> </div> Wed, 12 May 2010 21:53:36 -0400 http://www.ad-co.com/pubs_pipeline_archives?by_date=75 http://www.ad-co.com/pubs_pipeline_archives?by_date=75 <div class="article"> <h4>A Guiding Light: AD&Co Consulting Services by Rob Landauer</h4> <div class="content"><p>As the mortgage market and broader economy slowly start to show signs of renewed vigor, new opportunities and risks are being presented to investors, originators, servicers and risk managers. If your firm is contemplating a new strategy or venture related to the mortgage industry, AD&amp;Co’s team of seasoned and skilled professionals are poised to provide unparalleled advice and guidance. Led by Andrew Davidson, the AD&amp;Co Consulting team includes Rick Ellson PhD, Eknath Belbase PhD, Alex Levin PhD and William Searle. This team, along with our suite of prepayment, credit and valuation models and tools, can provide actionable solutions and advice that can mean success for your new initiatives.</p></div> <div class="article-link"><a href="/newsletters/2010/Apr2010/Update_Apr10.pdf">Open this article...</a></div> </div> <div class="article"> <h4>Enhancements to the LoanDynamics™ Model by Sanjeeban Chatterjee</h4> <div class="content"><p>We have made some enhancements to the LoanDynamics™ (<span class="caps">LDM</span>) model that impact the S-T (seriously delinquent to terminated) transition and the severity model. The foreclosure timelines in the model now reflect more recent trends, given legislative and social changes taking place in the housing market.</p></div> <div class="article-link"><a href="/newsletters/2010/Apr2010/Performance_Apr10.pdf">Open this article...</a></div> </div> <div class="article"> <h4>Risk-Based Capital: Approaches & Problems by Eknath Belbase</h4> <div class="content"><p>Risk-based capital and the relationship between rating agency ratings and risk-based capital is a topic of much current interest. In this article, we define risk-based capital, discuss what it is used for and why it is important, and discuss how banking and insurance regulators have approached the topic of minimum risk-based capital. Next, we look at what credit-ratings mean, and how ratings differ from risk and risk-based capital. We conclude by describing one approach that works for both loans and securities that has the desired properties and discuss some remaining challenges.</p></div> <div class="article-link"><a href="/newsletters/2010/Apr2010/Credit_Apr10.pdf">Open this article...</a></div> </div> <div class="article"> <h4>A Brief Guide to Delta and Effective Duration of MBS by Alex Levin</h4> <div class="content"><p>Several years ago I wrote &#8220;The Hunt for Duration&#8221; which describes several factors affecting the interest rate risk of <span class="caps">MBS</span>. Looking back and re-assessing the questions we are asked nowadays, I found that article to be useful, but insufficient. The current market environment has severely distorted traditional expectations of <span class="caps">MBS</span> rate risk: both agencies and non-agencies became “longer” but for different reasons; some IOs have nearly inverted their exposure.</p></div> <div class="article-link"><a href="/newsletters/2010/Apr2010/Valuation_Apr10.pdf">Open this article...</a></div> </div> Wed, 07 Apr 2010 11:45:45 -0400 http://www.ad-co.com/pubs_pipeline_archives?by_date=74 http://www.ad-co.com/pubs_pipeline_archives?by_date=74