Prepayment Update - May '07

Agency ARM Prepayment Model
by Dan Szakallas

AD&Co will be releasing an update for the Agency Adjustable Rate Mortgage (ARM) prepayment model next week, the week of it's 15th annual conference. The update includes new models for FNMA & FHLMC ARMs, with a focus on hybrids. The model incorporates AD&Co’s vision to unify models by providing a single framework for fixed and adjustable rate loans and across collateral types. A unified functional form helps us understand and evaluate risk measures and relative value in a consistent manner and makes implementation easier across systems. The model was developed using data from FHLMC and FNMA, and includes pools with prepayment penalties provisions, as well as interest-only features.

A Look at the Data

The ARM pools securitized by FNMA and FHLMC are made up of loans from several issuers. The loans within the pools must fall below the conforming loan balance limit established by both FNMA & FHLMC, and are typically good credit quality with less than a 90 LTV.

We obtained historical data from Sector, Inc., and 1010data.com, both which provide data directly from the agencies. By using pool codes and other data fields within the database, we were able to classify pools into ARM product types, such as 3/1, 5/1, 7/1, and 10/1 hybrids, as well as determine the interest-only period and prepayment penalty period for those pools with such features. The data spanned originations from 1994-2007, but most of the hybrid ARM data was concentrated from 2000 – 2007.

The model was developed using data from January 1994 through March 2007.