TITLE: A Continuous-Time Model for the Valuation of Mortgage-Backed Securities
SPEAKER: Stephen M. Mansour, PhD Candidate
DATE: Friday, December 9, 2011 from 3:30 – 5:30 pm
LOCATION: Room 451 Mohler, 200 W. Packer Avenue
ABSTRACT: A mortgage model consists of three basic parts: the amortization model which examines the mortgage cash flows, the interest rate model which affects the mortgage price, and the prepayment model which measures the rates of mortgage termination when a property is sold, refinanced or foreclosed. A technique known as eigenfunction expansion has proven to be useful in pricing continuous-time mortgages.
The first part of this presentation involves generalizing the existing interest rate Cox-Ingersoll-Ross model and including as an alternative the simpler Vasicek model and then comparing the results obtained by these methods. We also refine the relationship between interest rates and prepayments to reflect empirical data more accurately, particularly in low-interest rate scenarios by expanding the existing single-threshold prepayment model to include a secondary prepayment threshold.
The second problem expands the existing continuous prepayment model to include mortgage defaults. We use the default model to examine the price sensitivity of mortgages to loss severity and foreclosure rates. We also examine two practical applications of this model: accounting for wider spreads between mortgage yields and treasury yields during periods of economic stress, and estimating the value of the mortgage guarantee that government agencies such as Ginnie Mae provide to investors of mortgage-backed securities.
BIOGRAPHY: Stephen M. Mansour is a PhD candidate in the Department of Industrial and Systems Engineering at Lehigh University. He received a Bachelor’s Degree in Mathematics with Distinction in General Scholarship from the University of California at Berkeley in 1981 where he graduated Phi Beta Kappa. He worked at IBM East Fishkill, New York from 1982 to 1994 as an APL programmer. While at IBM he received a Division Award for “Outstanding Team Leadership During the Development of the ALORS2 Data Base”. During his tenure at IBM, he also received a Master’s Degree in Operations Research and Applied Statistics from Union College in 1992. He worked at Check-Free Corporation in Jersey City, New Jersey from 1994-1996 where he developed a billing system for portfolio managers, and at The Carlisle Group in Scranton, Pennsylvania from 1996-2008 where he developed an APL-based pricing and portfolio optimization system for use by mortgage companies. He is currently teaching statistics at the University of Scranton and at Penn State Worthington Scranton.
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