Valuation models
Mortgage pass-throughs
Monthly cash flows under PSA, constant CPR or a rate-driven refinancing model on Hull-White paths, OAS from a price, the borrowers' option cost, effective duration and negative convexity, and average life.
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Methodology
Conventions
- Monthly level-pay mortgages; the holder gets the net coupon, scheduled principal and prepayments after the delay.
- Rate-driven prepayments run on Hull-White paths fitted to the curve: turnover plus a refinancing S-curve in WAC minus the path's mortgage rate.
- Effective duration and convexity from 25bp parallel moves, OAS held, prepayments re-projected.
- An ARM pool's coupon resets to the path's 1-year rate plus the margin, within the periodic and lifetime caps.
References
- Fabozzi, The Handbook of Mortgage-Backed Securities
Formulas
- SMM
- SMM = 1 − (1 − CPR)^(1/12)
- Price
- P = Σ E[CFₘ Dₘ] e^(−OAS tₘ)
- Option cost
- OAS(σ = 0) − OAS