Multivariate.... the re-launch....

Mortgage Loan Applications:
Borrowers are less likely to move or trade up to another property especially within the current declining appraisal environment found nationwide. This dynamic is exponential for CRA Loans ( Community Reinvestment Act 1977)  From a mortgage securitization perspective, the most attractive feature of  these loans is that they are less negatively convex than agency conforming mortgages. Convexity refers to the price/yield curve with negative convexity meaning that the price/yield curve flattens as interest rates decline. CRA securities tend to benefit from limited extension risk (they are priced to a slow base prepayment speed) and less call risk because of limited refinancing alternatives for these borrowers. To evaluate CRA - backed securities, we calibrated our agency conforming prepayment model in two ways: 1) we slowed the housing turnover component of the model to be consistent with the slow baseline speed of loans; 2) we tempered the refinancing function to account for the CRA's lower sensitivity to interest rates. We have compared the projected prepayment sensitivity profiles of loans to agency conforming loans. Using this adjusted model, we can then compared nominal and option-adjusted spreads to other sectors in the mortgage and asset-backed markets. Our results show that securities compare favorably to equivalent agency securities on both a nominal spread basis and an option-adjusted spread basis. Under a declining interest rate scenarios, the better-quality loans in a conforming loan portfolio will self-select out through refinancing. Borrowers with better credit scores (660 and greater) realize that the cost/benefit of refinancing works to their advantage as rates decline. At the other end of the spectrum, borrowers with lower credit scores either cannot get refinanced or would have to do so at a cost that would be unfavorable. The net result in a declining rate environment is that the better loans refinance out.