In response to fluctuations in the mortgage marketplace due to the COVID-19 crisis, ZM Financial Systems (ZMFS) recently refit their proprietary prepayment model. The model treats different collateral types equally under a unified framework and projects voluntary and involuntary prepayments simultaneously.  Collateral coverage includes conforming 30-year, 15-year, hybrid ARMs and Jumbo mortgages.

“Our clients are seeing significant refinancing activity,” comments Phillip Reschke, Client Experience Manager, ZMFS. “While the incentive to refinance is very high considering the ultra-low rate environment, forbearance has dampened prepayment speeds to some extent. Additionally, many financial institutions were recently dealing with a massive number of applications for Paycheck Protection Program loans and consequently had little bandwidth or credit appetite, due to record unemployment, for new mortgages.  As a result, offered rates were not dropping as quickly as the decline in the yield of 10-yr U.S. Treasury bonds, as would normally be the case.”

“This is not just a retrofit, as we always fit the model to historical prepay data and try to hit the market forecast simultaneously,” notes Guo Chen, PhD, Director, Quantitative Research, ZMFS. “Significant at this point in time, we are slowing down the model prepay for premium FN30s, and most corresponding durations lengthened by about half year. For Jumbos, we are speeding up the model prepay for discount pools while slowing down prepays for old vintage premium pools. And for GN30s, we are slowing down the model prepay while extending the duration.”

Chen continues, “We continue to keep a close eye on the market and will do another refit if needed.”