Register here for next month’s call: Thursday, August 21st, 2025, 1 p.m.

Each month, we host a Models & Markets call to offer our insights into recent model performance, emerging credit risks, and broader economic indicators. This month, as interest rates remain elevated and economic uncertainty persists, we addressed how both conventional and AI-based modeling techniques are shaping decision-making processes across agency, non-QM, and ARM products.

Here’s a quick recap in case you missed it.

(Click here to listen to the entire 30-minute recording, or continue reading for a summary.)

Model Performance: Prepayment Dynamics in Focus

RiskSpan’s prepayment model continues to perform well based on benchmarking against actuals across coupon stacks. The team noted:

  • Speeds in higher coupons have slowed relative to expectations, in line with broader refinancing trends as mortgage rates remain high.
  • RiskSpan’s Non-QM Prepayment Model (v3.11) shows strong back-testing performance. While most vintages perform as expected, the 2022 vintage diverged, potentially due to ambiguous underwriting guidelines in QM loans that may have led to adverse selection in the Non-QM space. One possible reason is that this reflects borrower composition differences not captured by traditional metrics.

New ARM Model Launch

An enhanced ARM Prepayment Model (v3.8) is now live in production. It exhibits refined sensitivity to rate shocks and aims to provide improved accuracy for adjustable-rate portfolios in today’s volatile environment.

Claude the Research Assistant: AI in Action

One of the highlights of the call was a deep dive into how we are testing Claude (Anthropic’s well-known LLM) as a mortgage research assistant.

Using a dataset from RiskSpan’s Snowflake instance, Claude orchestrated an end-to-end analytical workflow, including:

  • Retrieving and aggregating partially pre-aggregated loan-level data
  • Generating Python code for analysis and visualization
  • Annotating charts and analyzing prepayment trends

Key Insights from Claude’s Analysis

Claude surfaced several noteworthy trends:

  • FICO Score Sensitivity: Higher credit score bands (>750) showed dramatically higher prepayment rates than lower bands (<650), highlighting the refinancing advantage for more creditworthy borrowers.
  • Loan Size Effect: A positive correlation (0.22) between loan size and prepayment rates suggests that larger loan holders are more motivated to refinance.
  • Mortgage Vintage: Newer vintages (especially 2015–2016) demonstrated greater prepayment sensitivity, likely due to looser underwriting and seasoning effects.
  • Interest Rate Sensitivity: Claude captured the sharp inverse relationship between rates and prepayment, particularly the COVID-era spike and the post-2022 slowdown.

Claude correctly reasoned with the provided data but could not identify some features (like “Spread at Origination”). This raises interesting questions about LLMs’ capacity to reason beyond their training corpus.

Market Outlook: Economic Signals Turning Cautionary

The macro backdrop continues to weigh on securitization and borrower behavior. Highlights from July’s indicators:

  • Mortgage Rates: Remain above 6.5%, with little sign of easing before the Fed’s expected first rate cut in September.
  • Fed Funds Rate: Currently 4.25–4.50%, with year-end projections settling around 3.75–4.00%.
  • Home Prices: Showing stability with little YoY movement in the Case-Shiller Index.
  • Labor and Inflation: Both unemployment and PCE inflation measures remain steady, but signs of economic headwinds are beginning to appear.

On the Horizon

  • RiskSpan’s new credit model (v7), which includes a new delinquency transition matrix, is on track for release by the end of the month.
  • Continued enhancements are being made to the Platform, including new prepayment and performance visualizations for private credit and agency MBS sectors.

Contact us to learn more.