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ABS

Kalotay MBS Model to Receive U.S. Patent

Published Updated 1 Min Read

The U.S. Patent Office will grant a patent for Andrew Kalotay Associates’s new CLEAN MBS model, according to representatives for the company.

CLEAN, which stands for Coupled Lattice Efficiency Analysis, combines accuracy with speed to perform valuation and risk analysis at 14,000 securities per minute.

The model determines refinancing based on mortgagor credit, and then discounts the resulting cash flow using the MBS issuer’s credit.

CLEAN automatically captures “burnout” or refinance fatigue following periods of low interest rates by tracking mortgagors with a higher propensity to refinance. Additionally, the option-based approach ensures consistency with the valuation of callable agency debentures.

“A major breakthrough is that our prepayment model is truly market-implied,” said Andrew Kalotay, the firm’s founder. “We calibrate to current TBA prices and mortgage rates, in contrast to the conventional backward-looking models.”

The methodology is described in An Option-Theoretic Approach to MBS Valuation in the sixth edition of Frank Fabozzi’s The Handbook of Mortgage-Backed Securities, available on the firm’s Web site.

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