Imperfect Models or Abused Models.


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SMMi = Refinancing Activity Housing Turnover. Renegotiating Activity ... Affectability of House Prices To Foreclosures. Affectability of Foreclosures to Prepayments ...
Transcripts
Slide 1

Defective Models or Misused Models The Role of Modeling in the Mortgage Meltdown

Slide 2

Basic Modeling Tenets Use it Appropriately Validate It Properly Stress It Understand it and Explain it Simplify It

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Structure of Practical Mortgage Modeling A situation (E i ) that speaks to the exogenous variables to the home loan/contract holder A nth request inhomogeneous Markov chains (X n ) which depicts the month to month development of the borrower\'s home loan status on the state space S. An income vector (CF n ) that speaks to the installment money streams from every way of the Markov Chains

Slide 4

Exogenous Environment A grouping of month to month projections to permit valuation, stress testing and investigation.

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State Space Choice of State Space based upon guarantee sort and utilize: State Space A: Three States, Two ending State Space B: Form Loan Performance Technical Paper: 9 states, 2 ending

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Transition Probabilities Combinations of Environmental variables (financing costs, HPI) and borrower variables (FICO, LTV, and so on.) Historical Roll Rates – Still Very Common Single Logistic Regressions Multinomial Logit Models: CPRi,t = exp ( x(i, t)\'  p )/An and CDRi,t = exp ( x(i, t)\'  d )/A where A = 1 + exp ( x(i, t)\'  p ) + exp ( x(i, t)\'  d ) x(i,t) autonomous variables: age, regularity, refi capacity, FICO score Custom Functions

Slide 7

Prepayment P(X n+1 =Prepayment | X n = Current, and so on) = SMM i SMM i = Refinancing Activity + Housing Turnover Refinancing Activity for the most part comprises of Refinancing motivator Seasoning Seasonality Burnout Media Effect Refinancing Activity = burnout * flavoring i * regularity t *refi n,t* Media Effect

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Refinance: S Curve 1 Ratio of C/R Where C contract rate R is business sector rate. 0

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OTS Prepayment Structures Media

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Sensitivities:

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Five Model Qualities Correct Usage: Payment Option ARMs: Validate It Properly: Stress It Understand it: Simplify It:

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