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The JP Morgan Prepayment Model. “It’s all about the economics”. Presenters: Cynthia Zander Joseph Cronin Rich ard Lyman. Key Model Features Curve at Origination Spread at Origination Impact of Loan Size Home Price Appreciation Burnout Turnover Model Refinancing Model
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The JP MorganPrepayment Model “It’s all about the economics” Presenters: Cynthia Zander Joseph Cronin Richard Lyman
Key Model Features • Curve at Origination • Spread at Origination • Impact of Loan Size • Home Price Appreciation • Burnout • Turnover Model • Refinancing Model • GNMA Prepayments • Historical Performance
Key Model Features • Self-selection captured through the incentive function • Home Price Appreciation • No Media Effect • Transparency of inputs • Separate FNMA and FHLMC refinancing models
Key Model Features • “We define our baseline economic incentive to be the percent savings.” • Weighted Average Maturity – WAM
Curve at Origination (CATO) • Allows the JPMorgan model to capture the refinancing “seasoning ramp” • Predict the evolving WALA (Weighted Average Loan Age) • Reaffirming steepness vs. flatness of the curve at origination determines future refinance of the individual • Has IO and PO implications down curve
Spread at Origination (SATO) • Through SATO, various non-standard collateral characteristics are captured
Turnover Model • Home Price Appreciation • Seasoning Ramp • Seasonality/Calendar Effects
Turnover Model Home Price Appreciation / Seasoning Ramp (14% Annually) (Loan Age) (Appreciation)
Turnover Model Seasonality / Calendar Effects (14% Annually) (Loan Age) (Appreciation)
Refinancing Model Shorter Amortization Schedules (incentive)
GNMA Prepayments • Loan Characteristics • Delinquencies • Servicer Buyouts • Loan Size
GNMA Prepayment Loan Characteristics
GNMA Prepayment Delinquencies
GNMA Prepayment Service Buyouts
GNMA Prepayment Loan Size
Historical Model Performance “Past performance is not an indication of future results”