Kamakura Corporation announced today that it is publishing a simple, accurate and transparent yield curve data series for the valuation of mortgages and mortgage servicing rights beginning Friday, October 19. Kamakura’s mortgage valuation yield curve technology is based on a new research paper by Kamakura Managing Director Prof. Robert A. Jarrow and Kamakura founder Dr. Donald R. van Deventer. The new paper, forthcoming in a peer-reviewed academic journal, is designed to overcome a number of very serious flaws in the conventional wisdom for mortgage and mortgage servicing rights (“MSR”) valuation: reliance on the manipulated Libor-swap curve; use of inconsistent models for prepayment, default and yield curve generation; and reliance on simplistic one-factor yield curve models that are inconsistent with 50 years of U.S. interest rate history. The Kamakura mortgage valuation yield curves are updated daily, with credit spread parameters updated weekly, and distributed via the Kamakura Risk Information Services division of Kamakura Corporation. The new KRIS mortgage yield service is designed to meet the requirements of the Financial Accounting Standards Board Accounting Standards Codification 860 (ASC 860) on the transfers and servicing of financial assets.
Martin Zorn, Chief Administrative Officer for Kamakura Corporation, said Thursday, “Accounting and risk management for mortgages, residential mortgage-backed securities, and mortgage servicing rights are beset with model risk that is far worse from a transparency point of view than the legacy analytics often blamed for the collapse of the collateralized debt obligation (CDO) market. Jarrow and van Deventer use some very powerful insights from the reduced form modeling of credit risk to show that accurate valuation of mortgage-related assets can be done in a simple, accurate and transparent manner that is fully consistent with the observable prices of mortgage assets and state of the art financial theory. The risk-adjusted valuation of mortgage-related credit and prepayment risk are derived simultaneously as part of the derivation process for mortgage valuation yield curves. This new approach should be of enormous interest to audit committees, chief financial officers, and chief risk officers of all firms who have a large or complex exposure to the mortgage market.”
The KRIS Mortgage Yield Service is generated using publicly available market data on U.S. Treasury yields and primary mortgage market terms. Kamakura uses advanced yield curve smoothing techniques to derive the smoothest credit spreads in the mortgage market that are consistent with observable U.S. Treasury yields and primary mortgage market pricing. These techniques have been embedded in Kamakura’s enterprise risk management software package Kamakura Risk Manager, which is now used in 23 countries and which has been in daily production on client sites since 1993. The KRIS Mortgage Yield Service contains daily yield curves since September 1991. The KRIS Premium Mortgage Yield Service contains daily yield curves since April 1971. Weekly, monthly and quarterly data series are also available on request.