Register here for our next monthly model update call: Thursday, June 19th at 1:00 ET.
Note: This post contains highlights from our May 2025 monthly modeling call, which delivered insights into the current economic climate, mortgage model enhancements, and borrower behavior trends. You can register here to watch a recording of the full 23-minute call.
Here’s what you missed:
Prepayment Model Performance and Enhancements
RiskSpan’s prepayment model continues to exhibit strong alignment with observed data across all coupon cohorts. During the call, we showcased updated backtesting results for 2022 FN/FH cohorts across multiple coupon bands (1.5s–3.5s, 4.0s–5.5s, and 6.5s), revealing that projected vs. actual CPRs remain closely correlated, even in volatile rate environments.
Additionally, RiskSpan has introduced a Non-QM-specific prepayment model to address behavioral differences in this segment. This is particularly timely, given elevated delinquency trends discussed later in the session.
Our recently enhanced Credit Model 7, leveraging a delinquency transition matrix, is expected to be released by the end of May and will provide a more granular view of credit migration patterns.
Spread at Origination: A Key Risk Signal
Spread at Origination (SatO), the difference between the borrower’s rate and the prevailing PMMS rate at application, is emerging as a critical predictor of refinance activity. Lower SatO values suppress prepayments even in pools with favorable coupons.
Using MBS loan-level data, we illustrated how SatO dynamics impact investor vs. owner-occupied loans, with notable geographic variation. States like CA, FL, and NY show materially different average rates for investor loans, independent of LLPA effects.
As a forward-looking initiative, we are developing a generalized spread model that isolates residual pricing differences not explained by known borrower or loan characteristics. This could further enhance predictive power by benchmarking loans against peer cohorts defined by origination date, FICO, occupancy, and geography.
Macroeconomic Outlook: Sticky Rates and Stable Housing
The economic backdrop remains mixed:
- Mortgage rates hover around 6.95%, with no near-term relief in sight.
- The Fed Funds Rate is projected to stay elevated, with the first potential cut not expected until September 2025. Even then, consensus suggests only a modest decline to 3.75–4.00% by year-end.
- Home prices are largely stable, as reflected in the Case-Shiller Index. Year-over-year appreciation remains positive but muted.
- Unemployment stands at 4.0%, and inflation is moderating but still above target.
This persistent high-rate environment will continue to dampen refinance activity and challenge affordability, reinforcing the importance of modeling spread-driven behavior accurately.
Non-QM Delinquencies Spike
The bad news: Delinquencies are surging within the Non-QM sector, particularly for 2022–2023 vintages:
- DSCR/investor loans are showing delinquency rates an order of magnitude higher than conventional loans.
- This reinforces the need for robust credit modeling, especially in the private credit space where standard agency risk buffers don’t apply.
The good news: RiskSpan’s new NonQM credit and prepay models are now live to support more accurate surveillance of these exposures.
Contact us to learn more or to request a free demo of our platform and models.
