Welcome to The S-Curve
Now you will be able to receive the latest announcements, product updates, and our insights on the mortgage market in real time.
The name of the blog, the S-Curve, is a reflection of our logo and the central feature of our prepayment model. S-curves are seen in nature in many phenomenon, from population growth to prepayment and default models. Our first S-curve, in the early 1990s, used the arctangent function, then piece-wise linear functions, and evolved over time to be more complex and vary by FICO, loan size and LTV. This evolution encapsulates both the timeless nature of fundamental relationships and constant innovation to describe them better over time.
We hope you find the information useful and we look forward to your feedback.
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Overview of Going to Extremes: Climate, Housing and FinanceEvents
Andy and I recently attended AmeriCatalyst ‘Going to Extremes’ Climate, Housing and Finance Leadership Summit in Washington, D.C., a fantastic conference on all things related to climate risk and the housing ecosystem. While going over all the great speakers and broad expertise represented there would take a novella, I want to connect a few key ideas discussed there to our ongoing efforts in this area.
Panels on climate and property level data and on the modeling that can be done with this data generally came to an agreement that we are getting to a point where property level impacts of increasing climate risk can begin to be measured using traditional mortgage risk metrics that practitioners are familiar with once climate-conditioning of behavioral and house price models is complete. Prior to this conference, we noticed a focus primarily on event-driven analysis, and I detected a general consensus emerging that the rapid rises in insurance cost (and drop of availability in cases where states interfere with rational price setting) ought to become our primary analytical input.
A related emerging idea is that the duration mismatch between the 1-year repricing of insurance and the 30-year fixed rate mortgage creates substantial risk (this was one of the key points of Andy’s presentation).
One speaker noted that this phenomenon is very similar to the financial crisis, where the industry created 2/28 adjustable-rate mortgages (ARMs) where the teaser was affordable, only to have them blow up 2-3 years later; now the teasers are insurance policies that go from being 20% of total principal, interest, taxes and insurance (PITI) to 60% of a much higher PITI within 3 years.
We are fortunate that, at this time, most borrowers have substantial amounts of equity. While the evolution of 3- or 5-year forward insurance pricing, combined with longer-term forecasts based on the best available climate risk models that would allow borrowers to avoid the riskiest areas could go a long way towards preventing a repeat of what happened with 2/28 ARMs , such developments are not underway. In fact, the risk from higher insurance premiums is potentially higher than the 2/28 ARMs risk (since everyone with a mortgage is subject to insurance repricing risk), and at least a fifth of core-based statistical areas (CBSAs) seem to have at least 10% of their properties in risky enough areas that insurance affordability will become a concern).
Discussions on mitigation and hardening highlighted some solutions: apart from getting to net zero and using carbon capture to reduce existing CO2 (global solutions), we can broadly do two sets of things: avoid the riskiest areas and make somewhat risky areas less risky by hardening our housing and infrastructure. More modern building code standards (which have been updated to account for changing climate conditions) and property level mitigation on existing housing stock, together with local infrastructure resiliency, can reduce the severity of events enough to mitigate future required insurance premium increases.
Another idea that came up in an interview that the journalist Diana Olick conducted on stage at the conference – that in searching for solutions and contributions to solutions, we “should not let the perfect be the enemy of the good,” which connects with our efforts in at least two ways. First, it is a good modeling philosophy to have: if we wait for the perfect model before releasing it to the market, we can end up waiting needlessly. By releasing something that is “good enough” to get started, we engage with the user community and begin the process of improving our models much earlier. Our clients begin to think about use cases and ways to improve their business practices much sooner.
Second, all of our efforts broadly help our clients avoid, manage and appropriately price the risk. A vision of perfection might entail coming up with solutions that not only shift the risk among market participants but solve systemic issues that impact the entire mortgage ecosystem. The problem with this vision of perfection is that systemic solutions require the participation of many different players: companies, regulators and multiple layers of government. We can seek to both help our clients begin to manage this risk in the near term and begin to work with the larger community on system-wide solutions in the intermediate and long term. The conference did not achieve a clear consensus on system-wide solutions but clarified the extent of the problems and laid out a menu of incremental steps, each of which could contribute to solutions.
The S-Curve Archives
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Events
At the recent AmeriCatalyst ‘Going to Extremes’ Climate, Housing and Finance Leadership Summit, I presented a session on how risks related to weather-related losses impact the housing finance system.
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Events
Andy and I recently attended AmeriCatalyst ‘Going to Extremes’ Climate, Housing and Finance Leadership Summit in Washington, D.C., a fantastic conference on all things related to climate risk and the housing ecosystem. While going over all the great speakers and broad expertise represented there would take a novella, I want to connect a few key ideas discussed there to our ongoing efforts in this area.
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Products
Andrew Davidson & Co., Inc (AD&Co) is thrilled to announce an expanding relationship with a Third-Party Vendor! AD&Co enjoys working with countless analytical providers to offer our clients seamless solutions and we would like to welcome Milliman M-PIRe™ to the team!
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Events
The Federal Home Loan Bank of San Francisco directed the Urban Institute to develop innovative and actionable ideas to close the gap between white and black homeownership rates, which is as wide today as before the Fair Housing Act, enacted 60 years ago. Homeownership is crucial to a fairer society because working and middle-class families most commonly create inter-generational wealth by owning homes with amortizing mortgages.
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Events
The Data Foundation of Mortgage Finance
Homeownership is the largest source of wealth accumulation and inter-generational wealth transfer for the working and middle class. However, the non-interest cost of financing is always an obstacle for first-time and low-wealth buyers, and underserved populations.
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Thoughts
In this blog post, we used the recently updated Mortgage Market Statistical Annual to examine the dynamics of residential loan origination by state and by market segments and highlight important trends.
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Products
Andrew Davidson & Co., Inc. (AD&Co) is pleased to announce the official release of Kinetics v1.10, the latest update to AD&Co’s modular platform for running the AD&Co suite of analytics. This update introduces the Multifamily LoanDynamics Module, the newest way to run Multifamily LoanDynamics Model (LDM). Investors, servicers, insurers and lenders can leverage this new module to better understand the prepayment and credit risk of their multifamily mortgage portfolio.
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Events
Andrew Davidson & Co., Inc. (AD&Co) held a webinar on June 8th entitled “Lessons Learned: Insights for Managing the Interest Rate Risk of Banks.” Mickey Storms from our Alliances and Policies team, Alex Levin from our Financial Engineering team and Andrew Davidson were featured speakers.
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Products
Andrew Davidson & Co., Inc (AD&Co) is pleased to announce the beta release of a new monthly report series titled “Specified Pool Prepayment Trends,” which aims at showing market prepayment trends for specified agency pools in support of pay-up analyses by investors, traders, and alike.
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Products
Andrew Davidson & Co., Inc (AD&Co) is pleased to announce that Polypaths LLC supports AD&Co’s Auto LoanDynamics Model (Auto LDM) providing prepayments, defaults and losses on auto loans and securities.