Register here for next month’s call: Thursday, October 16th, 2025, 1 p.m. ET. 

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’s call focused on the impact of the Fed rate cut, key macro indicators and a spotlight on the surging second-lien market. 

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

(Click here to listen to the entire 27-minute recording or continue reading for a summary.)  

Market Backdrop: September 2025

Mortgage rates have hit their lowest levels in nearly a year, averaging close to six percent. The Federal Reserve delivered its first rate cut of the current cycle in September 2025, reducing the target range from 400–425 basis points to a projected 350–375 basis points by year-end. Despite this easing, markets continue to anticipate relatively high rates into 2026. 

Inflation and unemployment are holding stable, but long-term headwinds persist, including sluggish real wage growth and affordability constraints in the housing market. Longer-dated Treasury yields are the key driver of mortgage rates, making them essential for investors to keep tabs on. As bond yields set the tone for borrowing costs across the economy, their movement will be critical in shaping both origination volumes and prepayment activity in the coming quarters. 

Spotlight on Second Liens 

The second lien mortgage market continues its emergence as one of the most active areas in structured finance. Issuance and securitization of second lien products have been increasing rapidly, with no signs of slowing. This expansion is driven in part by rising homeowner demand for tapping into the accumulated equity and lenders’ interest in capturing additional credit exposure in a higher-rate environment. 

Prepayment behavior in second lien mortgages, however, differs significantly from that of first liens. This divergence makes specialized model calibration critical. RiskSpan’s Prepayment Models, calibrated against actual second lien performance, indicate that the models are capturing observed dynamics effectively. With issuance expected to continue climbing, accurate modeling of second lien prepayment risk will remain an essential tool for market participants seeking to price and manage these assets. 

Prepayment Model Updates 

Back-testing continues to show that RiskSpan’s prepayment models are tracking well against observed performance across a variety of collateral types. Recent analysis of agency MBS vintages from 2021 and 2022 revealed that higher-coupon pools, particularly those in the 6.5% range, are slowing more than originally anticipated. 

FN/FH 2021-2022 6.5s

By contrast, lower- and mid-coupon pools—those ranging from 1.5% through 5.5%—have remained steady and closely aligned with model expectations. This outcome reinforces the robustness of the models across different coupon bands and provides confidence in their ability to capture nuanced prepayment behavior. 

FN/FH 2021-2022 1.5s – 3.5s

FN/FH 2021-2022 4s – 5.5s

As we introduced during our August call, consumer credit remains a major focus of RiskSpan’s modeling enhancements. Using the Equifax Analytic Dataset, the team has constructed prepayment aging curves for both auto loans and personal loans. These analyses confirm that borrower credit score bands, measured using VantageScore 4.0, influence prepayment behavior in a manner similar to mortgage loans. For auto loans, the score sensitivity is particularly evident across borrower segments. Personal loan data show similar trends, with one notable difference: the effect of loan term is more pronounced after the first year of loan seasoning. This suggests that term structure plays a more significant role in personal loan prepayment decisions compared to auto loans. 

Auto Loan Prepayment Aging Curves

Personal Loan Prepayment Aging Curves

We are in the process of finalizing these consumer loan prepayment models and will release them shortly on the RiskSpan Platform. This will give clients the ability to incorporate a new level of borrower insight into their own portfolio analytics. 

Looking Ahead 

The integration of Equifax ADS into the construction of prepayment aging curves is just the beginning. We continue to expand our modeling capabilities and data integration in order to provide clients with deeper and more actionable insights. Credit card and student loan models are already in the pipeline, and their release will extend RiskSpan’s modeling coverage across the full spectrum of consumer credit products. 

In addition, the team is adding new analytics reports to the Platform, giving clients free access to timely updates and market intelligence. These ongoing enhancements underscore our commitment to equipping the investment management community with the tools and data needed to navigate complex and evolving credit markets. 

Contact us to discuss or learn more.