Register here for our next monthly model update call: Thursday, May 15th at 1:00 ET.

Note: This post contains highlights from our April 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 28-minute call.

Here’s what you missed:

Market Overview: A Climate of Volatility

With mortgage rates rebounding to 7%, the panel began by acknowledging the choppy waters ahead, flagging 2025 as a year likely to see persistent rate volatility. As recession risks grow and consumer stress indicators rise, modeling accuracy becomes more important than ever.

Notably, consumers are already strained:

• Rising consumer debt burdens
• Increased use of personal loans and second liens for debt consolidation
• Spikes in HEL/HELOC originations and securitizations
• Climbing Non-QM delinquencies, particularly among 2022–2023 vintages

Model Update: Credit Model v. 7.0

RiskSpan’s newly released Credit Model v7 marks a significant upgrade in loan performance modeling:

• Delinquency Transition Matrix core structure
• The model projects:
  • Monthly CDR, CPR, and delinquency balances (0 through REO)
  • Loss severities, liquidated balances, and P&I flows
• Modular components include:
  • State Transition Model
  • Severity and Liquidation Timeline Modules
• The model is fully integrated within RiskSpan’s platform, enabling custom inputs for whole loans and securities

This model empowers users with granular delinquency and cash flow forecasting, critical for managing portfolios amid market uncertainty.

Daily vs. Monthly Prepayment Trends: A Granular Look

Key findings here included:

• Daily prepay data showing extreme volatility, but offering early trend visibility
• Trend lines derived from daily data offering good proxies for future behavior
• Notable discrepancies within MBS-level data, especially among higher-coupon pools

RiskSpan’s continued focus on benchmarking these data sources helps refine both near-term and long-term modeling strategies.

Prepayment Behavior of Top-Tier Borrowers

The panel spotlighted borrowers with FICO scores over 800, revealing some counterintuitive dynamics:

• Initial refinance activity is higher in the 800+ cohort—”fastest out of the gate”
• But post-seasoning, refinance rates fall below those of the 700–750 FICO group
• This “crossover pattern” reflects a phenomenon the team called “Accelerated Burnout”
• Assumed strategic behavior, like exploiting lender credits, may amplify early refinance intensity

These insights underscore the nonlinear and evolving nature of borrower behavior, especially under fluctuating rate environments.

Model Performance: Staying on Track

RiskSpan’s Prepayment Model continues to track closely with actuals, validating its calibration even in today’s turbulent landscape. Combined with Credit Model v7, clients now have powerful tools for capturing credit and prepayment risk with more accuracy than ever.

Be sure to register for next month’s model update call on Thursday, May 15th at 1:00 ET.

Want a deeper dive into the new Credit Model or Prepay insights? Contact me to schedule a session with our modeling experts.

Note: This post contains highlights from our February 2025 monthly modeling call. You can register here to watch a recording of the full call (approx. 25 mins).

As we move further into 2025, key trends are emerging in the mortgage and credit markets, shaping risk management strategies for lenders, investors, and policymakers alike. RiskSpan’s latest model update highlights critical developments in mortgage prepayments, credit performance, and consumer debt trends—offering valuable insights for investors, traders, and portfolio/risk managers in these spaces.

Prepayment Trends: High rates = Slowing Speeds

Prepayment speeds have continued to decline in Q1 2025, largely due to a lack of housing turnover and persistently high mortgage rates. While a drop in rates during Q3 2024 temporarily mitigated lock-in effects for borrowers with very low rates, MBS speeds remain low across most cohorts.

Key drivers of observed prepayment behavior include:

• Mortgage rates are expected to stay high (~6.5%+) throughout 2025, keeping refinancing activity muted.
• Turnover remains the primary driver of prepayments, with most MBS pools significantly out of the money.
• RiskSpan’s Prepayment Model v3.7 effectively captures these dynamics, particularly the impact of deep out-of-the-money (OTM) speeds based on moneyness.

Credit Market Trends: Rising Non-QM Delinquencies and Debt Pressures

Growth in Non-QM and Second Lien Originations

The private credit market continues to expand, with increasing Non-QM and second lien originations. However, a concerning delinquency trend has emerged, with delinquencies among 2022-2023 Non-QM vintages now rising faster than among older vintages.

Consumer Debt Pressures Mounting

Consumer debt continues to rise rapidly, raising concerns about long-term credit performance:

• Credit card balances have increased significantly, with utilization climbing from 22% in 2020 to 30% by late 2024.
• More consumers are turning to personal loans for debt consolidation, a sign of financial strain.
• Second liens (HEL/HELOCs) are being used to pay off high-interest debt, fueled by strong home equity growth since 2020.

Model Enhancements

To address these evolving market conditions, RiskSpan has rolled out key enhancements to its mortgage and credit models:

• Prepayment Model v3.7 – Captures deep out-of-the-money lock-in effects with improved accuracy across Fannie, Freddie, and Ginnie collateral.
• Credit Model v7 – Introduces a Delinquency Transition Matrix, providing more granular forecasting for loans and MSR valuation.
• Non-QM Prepayment Model – Developed using CoreLogic data, offering improved prepayment insights for Non-QM loans.

Looking Ahead

• Rates are likely to remain high, with no reductions expected before summer.
• Home equity growth remains strong, driving continued second lien origination.
• Debt servicing costs are beginning to strain consumers, as high interest rates persist.
• Delinquency rates show strong correlation to credit quality, signaling potential risks ahead.

The evolving mortgage and credit landscape underscores the importance of robust modeling and risk assessment. With prepayments slowing, debt burdens rising, and consumer credit trends shifting, lenders and investors must adapt their strategies accordingly.