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February-28-2022

Black Knight’s Optimal Blue Mortgage Lock Data Used to Forecast Short-Term Prepayment Activity, Enhance Behavioral Models

Company Issues White Paper on Finding

    • Prepayment propensity is an important indicator of a loan’s future cash flow, itself a primary driver of value for mortgage-backed securities (MBS) and mortgage servicing rights (MSR)
    • Existing prepayment models project single-month mortality (SMM) prepayment rates using traditional inputs; daily rate lock data can provide an earlier, concrete indicator of prepayment risk
    • Rate lock activity can enhance prepayment forecasting efforts because it reflects a decision already made by the borrower, not an external factor that may or may not lead to certain behavior
    • Black Knight captures origination rate lock data as an output of its Optimal Blue Product, Pricing and Eligibility (PPE) engine, which is then accessible through its Optimal Blue Mortgage Lock Data product
    • The Optimal Blue PPE captures key loan, borrower and property attributes at the point of rate lock, enabling rate locks to be separated into cohorts to match investors’ MBS pools or MSR loan portfolios
    • In a complimentary white paper, Black Knight examines using Mortgage Lock Data as a predictor of short-term prepayment speeds, supplementing behavioral models leveraging long-term historical data

JACKSONVILLE, Fla. – Feb. 28, 2022 – Today, Black Knight, Inc. (NYSE:BKI) released a complimentary white paper exploring the use of mortgage pipeline rate lock data to inform daily prepayment modeling. As a primary indicator of a loan’s future cash flow, prepayment prediction is a critical component of valuing both mortgage-backed securities (MBS) and mortgage servicing rights (MSR). Black Knight captures origination rate lock data as an output of its Optimal Blue Product, Pricing and Eligibility (PPE) engine – mortgage lending’s most widely used product and pricing engine – which is then accessible through its Optimal Blue Mortgage Lock Data product.

“Interest rate movements are the leading signal of prepayment rates,” said Scott Happ, president of Optimal Blue, a division of Black Knight. “As rates fall, borrowers are incentivized to refinance, which leads to a higher incidence of prepayment. In most cases, a rate lock will occur at roughly the same time as the application is submitted to the lender, reflecting a concrete decision on the part of a borrower to pursue funding. The timing of the lock makes it the most reliable, initially observed event in the mortgage process and a leading indicator of prepayments to the extent that a new mortgage, identified by the rate lock, will replace an existing loan. Pulling near real-time rate lock data into prepayment modeling pushes our industry closer to achieving a daily view of mortality rates.”

The white paper looks at the viability of predicting short-term prepayment speeds by tracking Optimal Blue Mortgage Lock Data – a potentially game-changing supplement to traditional behavioral models leveraging historical prepayment data. To demonstrate the predictive quality of rate lock activity, monthly volumes in the Mortgage Lock Data were compared to Single Monthly Mortality (SMM) as calculated from Black Knight’s McDash mortgage performance dataset. McDash data is servicercontributed and provides primary-sourced data for roughly 70% of all active residential U.S. mortgages and is widely used in the industry as a source of truth for prepayment speeds.

“Certainly, those concerned with mortgage prepayments have long considered application activity as a precursor for prepayments,” Happ continued. “But they have never been able to segment this early activity to predict prepayments on specific cohorts of MBS or MSR investments. Optimal Blue Mortgage Lock Data can be used as both a model input and a benchmark to compare existing prepayment assumptions. We urge prepayment analysts to test the value of incorporating rate lock data into their forecasting models. Our research suggests it will improve the predictive capability of prepayment models above and beyond standard inputs, particularly for modeling prepayment activity in the short term.”

Among the core takeaways included in the white paper is the demonstrable correlation between prepayment prediction and in-stratification lock activity. This parallel suggests that including combinations of selected cohorts into a predictive prepayment model could prove beneficial for more accurate valuations of MBS and MSR.

About Black Knight
Black Knight, Inc. (NYSE:BKI) is an award-winning software, data and analytics company that drives innovation in the mortgage lending and servicing and real estate industries, as well as the capital and secondary markets. Businesses leverage our robust, integrated solutions across the entire homeownership life cycle to help retain existing customers, gain new customers, mitigate risk and operate more effectively.

Our clients rely on our proven, comprehensive, scalable products and our unwavering commitment to delivering superior client support to achieve their strategic goals and better serving their customers. For more information on Black Knight, please visit www.blackknightinc.com.