Patented, extremely fast, prepayment model and valuation library for MBS

CLEAN - Coupled Lattice Efficiency Analysis - determines refinancing based on mortgagor credit and then discounts the resulting cash flow using the MBS issuer’s credit. This approach allows for exceptional speed —14000 securities per minute, or roughly 100 times faster than conventional routines — without compromising accuracy.

By tracking mortgages with a higher propensity to refinance, CLEAN automatically captures “burnout (refinance fatigue following period of low interest rates). In addition, the approach ensures consistency with the valuation of callable agency debentures, said the company.

The CLEAN prepayment model is truly market-implied. It calibrates to current TBA (To Be Announced) prices and mortgage rates, in contrast to the conventional backward-looking models.

Leading trading and risk management platforms have integrated CLEAN to take advantage of its accuracy, speed, internal consistency and external consistency.

The methodology is described in An Option-Theoretic Approach to MBS Valuation, which appears in the 6th edition of Frank Fabozzi’s The Handbook of Mortgage-Backed Securities.

  • Agency and non-Agency pass-thrus
  • Interest-only and Principal-only Strips
  • Mortgage Servicing Rights

Required inputs:

  • Terms and conditions of the MBS
  • Interest rate environment
    • Benchmark yield curve
    • Volatility
    • Mean reversion
  • Prepayment parameters
    • Mortgagor credit spread
    • Turnover speeds
    • Curtailment speeds
    • Refinancing distribution

Output valuation and risk measures:

  • MBS OAS, given MBS price
  • Following valuation and risk measures, given MBS OAS
    • Price
    • Effective duration
    • Effective convexity
    • OAS duration
    • OAS convexity
    • PV of projected cash flows
    • Fair value of refinancing option
    • Average CPR
    • Yield
    • Modified duration
    • Modified convexity

Related Research: MBS and Mortgages