[Andrew Davidson & Co] Fixed-Rate Agency MBS Prepayments and Model Enhancements

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1、QuantitativePerspectivesMay2006Fixed-RateAgencyMBSPrepayments&ModelEnhancementsbyDanSzakallasQPQuantitativePerspectivesMay2006IntroductionTheAndrewDavidson&Co.,Inc.FixedRatePrepaymentModelversion5.1representsamajorstepforwardinprepaymentmodeling.ThemodelincorporatestheActive-PassiveMethodologyforb

2、urnoutaswellastheenhancedpooldatafromFannieMae,FreddieMacandGinnieMae.Thismodelisbaseduponpooldatafrom1992to2005andtheenhanceddatadisclosurefromtheagenciesbeginninginJune2003.TheinitialversionofthemodelwasreleasedinOctober2005.Thisarticlebeginswithadiscussionofourprepaymentmodelingphilosophy.Next,

3、weexplainthedataandtheexistingfactorsinourmodel.Wereview,indetail,thevariousfactorsthatdrivethemodelanddiscussanewapproachtomodelingthe'burnout'effectseeninprepaymentmodeling.Wewillcomprehensivelyexaminethisapproach,calledActive-PassiveDecomposition(APD),andillustrateitsadvantagesformodelingandfor

4、valuationpurposes.WewillalsodiscusshowtheAgencydatadisclosuresareincorporatedintothenewEnhancedPrepaymentModel.Finally,wewillcompareprepaymentmodeloutputfromv5.1tothepreviousversionofthepoolmodelandreviewvaluationresultsusingourOASandinterestrateroutinesandthenewprepaymentmodel.ModelingPhilosophyA

5、ndrewDavidson&Co.,Inc.(ADCo)believesthatprepaymentmodelingatthepoollevelisamixtureofscienceandart.Thekeycomponentsofprepaymentshavebeenunderstoodandmodeledforsometime,andavarietyofstatisticaltechniquesexisttomodelmanyofthenon-linearfeaturesofprepaymentbehavior,suchasinterestrateeffectsandhousingtu

6、rnover.Thevariousfactorsaffectingprepayments,however,tendtointeractinwaysinwhichstandardstatisticaltechniquesmaybeill-equippedtohandle.Borrowerbehaviorchangesovertimeduetostructuralchangesinthemarket,andnewfactorsmayinfluencewhenandwhyprepaymentsoccur.Forexample,inourlastmodelrelease,weexaminedhow

7、homepriceappreciationbegantospurthe'cash-out'refinance--inwhichborrowerswererefinancingtheirloansinordertakeadvantageoftheequityintheirhomes.1Thiswasanotableadditionbecauseithelpedexplainhigherprepaymentsduringpe