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Lisa Malie, SVP
Capital Markets Group
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Wednesday, July 07th, 2010.
Over the past three years, the mortgage market and financial markets in general have been in turmoil. After years of rising house prices, diminishing credit quality, and increasing leverage, the money train came to a screeching halt, leaving no player in the market untouched in some way – not banks, not mortgage companies, not government sponsored entities, not companies like MIAC that support the mortgage market with products and services, not even the average American citizen.
It was during this time of uncertainty that MIAC launched its most recent effort to upgrade all of its software product offerings. This was no small undertaking, given the upheaval across all financial markets. While so many financial institutions turned a blind eye to the underlying risks in the market, MIAC was dealing with those risks every day as we worked with our clients to value the full range of mortgage assets – loans, servicing, bonds, etc. It was this first-hand experience, in the trenches with both our software and consulting clients, which drove our software upgrade priorities.
Expanded Modeling Capabilities
As is evidenced by the changes we have witnessed in the mortgage market over the past several years, it is critical that our financial models and data tools evolve as well. The most updated release of the MIAC Analytics applications incorporates a host of additional features giving our users expanded modeling capabilities across the valuation spectrum.
As we read in the news every day, mortgage defaults are on the rise across the board (see Mike Carnes article “Residential MSR Market Update” in this issue of perspectives). The valuation implications of this environment are significant. Many of the model enhancements incorporated into WinOAS™ Version 4.1 SP3 are specifically geared toward capturing these impacts. From broadening our default curve options to expanding our default-related cost and advance parameters, this new release gives users greater flexibility in capturing the key default-related behaviors and resulting costs.
Originators, servicers, and investors continue to grapple with the impacts of this diminishing performance. In response, there has been increased focus throughout the market on both providing assistance to borrowers through loan modifications and forcing originators to take back loans through stricter enforcement of rep and warranty provisions. The economic impact of both of these industry dynamics is very real, and WinOAS 4.1 SP3 provides the framework for modeling this impact.
In early 2009, the Homeowner Affordability and Stability Plan was announced. As part of that plan, the Home Affordable Modification Program (HAMP) was detailed as a way to help keep homeowners in their homes and out of foreclosure. As part of this program, there are specific cash flows, payable by the federal government, which are potentially available to servicers, lenders, and borrowers. In WinOAS 4.1 SP3, users have the ability to model these cash flows consistent with the HAMP program. Further, the Loan Modification Model provides flexibility to allow users to model other modification programs as well. Additionally, MIAC incorporated the modification decision process, as specified in HAMP, into DataRaptor® Version 4.2. This logic can be made available to clients on a case by case basis.
For reps and warrants, WinOAS 4.1 SP3 includes a Rep & Warranty Model that allows the user to quantify the cost associated with anticipated investor repurchase or putback requests under rep and warranty provisions. Additionally, the model allows the user to estimate the contingent liability requirements associated with future required repurchases.
Given the volatility the market has experienced recently, measuring price sensitivity given a variety of mortgage basis models is critical. Enhancements to WinOAS 4.1 SP3 allow users to create basis models based on a variety of techniques including mean reversion, volatility, and traditional discreet spreads. This flexibility is critical in addressing the sensitivity and stress testing requirements that the market is facing.
The previous release of WinOAS introduced MIAC’s industry-leading Libor Market Model (LMM) term structure model. LMM has been enhanced in the newest WinOAS release to give an even more accurate match between model volatility and market volatility. This was done by an enhanced zero-error calibration of the market volatility surface. As a result, interest rate products with embedded optionality are priced with the highest degree of accuracy.
Considering the impact of home price depreciation on asset valuation and the financial markets in general, understanding the current, underlying property value associated with a mortgage-related asset is critical in accurately modeling project defaults and other borrower behavior patterns. DataRaptor 4.2 contains an automated interface to publically available FHFA home price index data at the CBSA level. This index is applied at the loan/property level in order to provide an updated, estimated property value which gives users the opportunity to accurately assess the risk inherent in their mortgage book.
Within DataRaptor 4.2, MIAC integrated with Standard & Poor’s Levels® RMBS Credit Model, giving our whole loan valuation clients an additional option in modeling two of the critical components of loss - foreclosure frequency (or probability of default) and loss severity - at all S&P credit levels. S&P Levels output works seamlessly with the new Rating Default Model (RDM) within WinOAS. The RDM allows the user to specify a foreclosure timing curve over which to apply a loan/tranche-level probability of default.
Integration Options
Over the past several years, as the financial markets have weathered a storm of write-downs, bailouts, and government takeovers, financial models have come under intense scrutiny, particularly those used to predict borrower behavior and key economic factors relevant for asset valuation. MIAC has always made available a variety of model options within WinOAS, particularly for modeling both defaults and prepayments. As we migrated to WinOAS 4.1 SP3, we updated our existing integrations with key third-party prepayment models. In addition, we have integrated with new credit models, giving our clients flexibility in modeling a variety of potential outcomes or scenarios for their financial assets.
Specifically, WinOAS 4.1 SP3 is integrated with the following models:
- Andrew Davidson & Co. Prepayment Model v5.2(g)
- Andrew Davidson & Co. LoanDynamics™ Credit Model v1.8.1(a) (in final testing)
- LPS Applied Analytics (formerly AFT) Prepayment and Credit Model v546
In keeping with MIAC’s Open Box Technology concept, we also continue to work with our clients to integrate with their internal prepayment, credit, and rate models, updating those integrations with success model releases (both MIAC’s and our clients). WinOAS provides the cash flow engine in support of these internally developed, client specific behavioral models.
Verification and Validation
As noted in Alex Samuel’s article “Making Sure You Have the Right Model – And That Your Model is Right”, which also appears in this issue of MIAC Perspectives, verifying and validating any financial model is critical to successful system implementation and results. As we migrated each of our products to the newest version, MIAC applied an exhaustive testing and validation process, drawing upon resources in Development, Quality Assurance, Line of Business, and Product Management.
MIAC employs the entire suite of MIAC software products extensively in support of our consulting, hedging, pipeline management, and other third-party valuation assignments. As such, we have extensive experience in verifying and validating not only our own models, but in assisting our clients and their auditors in doing the same. Further, our modeling experience has given us an edge in validating third-party models as well, including reconciling our models to a myriad of client and other commercially available models.
Building again upon the principle of transparency, MIAC created a detailed reconciliation tool for WinOAS 4.1 SP3. This Excel-based tool allows users to reconcile each individual revenue and expense component inherent in the calculation of asset value. The tool incorporates open, user-verifiable formulas providing a comparison of system-generated and user-generated calculation results at the component level. MIAC makes this tool available to our software clients as an integral part of our upgrade process.
Transparency and Control
MIAC has always been in the forefront of providing our clients transparent, validated, sound financial modeling and data management tools. The most important principles that guide our upgrade efforts have always been Transparency and Control. While Sarbanes-Oxley brought these principles to the forefront almost 10 years ago, the most recent financial crisis only served to strengthen the need for models that are transparent and controllable.
MIAC put those principles to action in several areas. While WinOAS, MIAC’s cash flow engine, has long incorporated functional permissions at the user level, we now have incorporated this same concept into DataRaptor 4.2, MIAC’s robust data management tool. Clients have the ability to control, at the user level, the functions that can be performed within the system including building data templates, identifying and mapping key data fields, creating audit rules and business logic, and formatting and generating output.
These data functions, independently and collectively, provide the foundation for meaningful cash flow analysis and asset valuation. DataRaptor now provides the ability to track changes made within the system at the user level, giving clients the ability to hold users accountable for their work.
In WinOAS 4.1 SP3, MIAC has expanded the cash flow parameters that can be exported from the model. With transparency as our guide, we identified key elements impacting all asset valuations and explicitly incorporated those elements into the cash flow export function. These parameters, including P&I advance balances, escrow balances, delinquent payments (as opposed to delinquent loans), etc., are used to drive key revenue and/or expense calculations in the model.
As we added additional modeling capability into WinOAS 4.1 SP3 for cash flow streams such as escrow and corporate advances, we made sure that at the onset, all cash flow components to these calculations were explicitly available in the cash flow export tool. On the whole loan valuation side, key cumulative cash flow parameters such as cumulative principal loss and cumulative liquidated balance, previously only available by exporting cash flows, is now available (at the loan/tranche level) as a standard output from the calculation process.
Also in WinOAS 4.1 SP3, the standard report set available to clients was vastly expanded, providing more transparency to both the valuation assumptions and the valuation results. The standard assumption reporting set was significantly expanded to include detailed information on model types, settings, and parameters. Users now have a clear and concise way of validating not only the assignment of models to groups of loans but also the specific details of the model implementation.
Finally, Windows Authentication was implemented across all MIAC Analytics software applications. Windows Authentication gives companies a single point of control for access to all systems, including MIAC Analytics products. User groups and permissions can be maintained in a central location without the need to replicate these groups and permissions within the MIAC applications. Access to the MIAC applications can now be driven from the Active Directory, making it simpler to manage and control without the need for individual, user-based permissions files.
The Extras
As with any software release, it’s often the “little things” that make the most difference to the day-to-day users of our software, and this most recent release features a number of those “little things”. From performance enhancements (like distributed processing capability in DataRaptor and enhanced portfolio loading speed in WinOAS) to user tools (like importing rules and tracing field dependencies in DataRaptor), speed, efficiency, and user experience once again played a key roll in MIAC’s enhancement process. The highlights associated with MIAC’s most recent release for both DataRaptor and WinOAS are many. From enhanced default modeling, to third-party integrations, to market-leading analytics, the MIAC Analytics suite of products provides our users with a solid foundation for analyzing and valuing a variety of assets even in today’s unprecedented financial market.
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