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Yihai Yu

Yihai Yu
Executive Director, MSCI Research

About the Contributor

Yihai Yu is an Executive Director and Global Head of Mortgage Research, focusing on development of mortgage models and research strategies. Previously, Yihai was a Director at Credit Suisse and Head of Agency MBS Modeling. Yihai received his Ph.D. in Physics and an M.S. in Computer Science from the University of Georgia.

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Contributions by Yihai Yu

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  1. PAPER

    MSCI Agency Fixed Rate MBS Prepayment Model Version 2.0 

    Apr 20, 2021 Yihai Yu

    Risk Management

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    This Model Insight document describes the details of the new MSCI Agency Fixed Rate MBS Prepayment Model Version 2.0 (MSCI2.0) focusing on the changes as compared to the previous version model - The MSCI Agency Fixed Rate MBS Prepayment Model Version version 1.0 (MSCI1.0) .

  2. BLOG

    A New COVID-19 Regime for MBS? 

    Feb 17, 2021 Yihai Yu , Miklós Vörös

    Fixed Income , Integrated Risk Management

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    In 2020, the Federal Reserve’s purchases of mortgage-backed securities, low interest rates, mortgage-underwriting policy changes and technology advancements led to a historic refinance frenzy and posed an unprecedented challenge for MBS risk management.

  3. PAPER

    MSCI Agency MBS Model Performance Review 2020 

    Jan 28, 2021 Yihai Yu

    Factor and Risk Modeling , Risk Management

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    This Model Insight document reviews and approves the MSCI Agency fixed rate prepayment model performance in 2020, based on the MSCI Securitized Product Model policy.

  4. BLOG

    Can MBS Duration Turn Negative? 

    Sep 29, 2020 Yihai Yu

    Fixed Income , Risk Management

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    As mortgage rates have hit record-breaking lows, prepayment speeds have doubled. With the combination of a high price premium and elevated prepayment speed, could duration of mortgage-backed securities stray into negative territory?

  5. PAPER

    MBS Performance through COVID-19 

    Sep 21, 2020 Yihai Yu

    COVID-19 , Factor and Risk Modeling , Risk Management

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    This Model Insight document discusses the performance and updates of MSCI Agency MBS prepayment and mortgage rate models through the COVID-19 pandemic.

  6. BLOG

    Are Securitized Products Ready for the LIBOR-SOFR Transition? 

    Sep 2, 2020 Joy Zhang , Yihai Yu

    Fixed Income , Integrated Risk Management

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    Will the securitization industry be ready for the transition from LIBOR to the secured overnight financing rate (SOFR), as it faces the fact that LIBOR can no longer be guaranteed beyond the end of 2021? As the industry mobilizes, significant challenges remain.

  7. PAPER

    MSCI Agency Prepayment Model Updates 

    Aug 21, 2020 Yihai Yu

    Factor and Risk Modeling , Risk Management

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    The document describes the impact of MSCI Prepayment Model updates for the 2020 Adverse Market Refinance Fee. Initially planned to be effective from September 1, 2020, this additional surcharge has been announced by Fannie Mae and Freddie Mac (Enterprises), to cope with the increasing credit loss related to COVID-19 pandemic. On August 25, 2020, Federal Housing Finance Agency (FHFA) directed the Enterprises to delay the implementation until December 1, 2020 and exempt refinance loans with loan balances below $150,000 from this surcharge.

  8. The valuation of mortgage-backed securities is highly dependent on the accuracy and mathematical construction of the chosen interest-rate models. In this document, we discuss two key aspects of the choice of an interest-rate model for MBS: volatility skew and correlation structures of forward rates.

  9. PAPER

    MSCI Two-factor Interest Rate Model 

    Jun 22, 2020 Yihai Yu , David Zhang

    Factor and Risk Modeling , Risk Management

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    This paper describes the MSCI Two-factor Interest Rate Model.

    The future cash flow of Mortgage-Backed Securities (MBS) is uncertain due to the embedded prepayment options. The typical MBS valuation relies on Option-Adjusted Spread (OAS) framework to price these prepayment options, which are a series of derivatives of interest rates across multiple tenors. A stochastic term structure model is subsequently needed with a reference curve and a volatility surface, which generates distributions of swap rates as inputs for mortgage rate models to evaluate optionality of MBS bonds. The valuation of MBS depends highly on the accuracy and mathematical construction of the chosen interest rate models.

    MSCI Two-Factor Interest Rate Model (2FIR) is a two-factor Heath-Jarrow-Morton (HJM) model with two Markovian state variables, implemented through Monte Carlo simulation with 250-path as default setting. This Model Insight document describes the mathematical details of MSCI Two-Factor Interest Rate Model for securitized products.

  10. BLOG

    Could coronavirus depress US housing prices? 

    Apr 15, 2020 Yihai Yu , Joy Zhang

    Risk Management , Fixed Income

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    The large economic shocks unleashed by the coronavirus pandemic could be comparable to or even exceed those of the 2008 global financial crisis (GFC). We used our models to assess whether these shocks could hurt U.S. housing prices as much as the GFC did.

  11. BLOG

    Updating the MSCI Agency MBS model for the COVID-19 crisis 

    Mar 24, 2020 Yihai Yu

    Fixed Income , Risk Management

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    The COVID-19 pandemic has severely strained U.S. housing finance, distorting near-term prepayment speeds for mortgage-backed securities. With MBS in uncharted territory, we updated the MSCI Agency MBS Model to help investors during the crisis.

  12. PAPER

    Agency MBS Current Coupon Calculation from TBA Prices 

    Mar 12, 2020 Yihai Yu , David Zhang , Miklós Vörös

    Factor and Risk Modeling , Risk Management

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    Current coupon yield ("cc") is a headline indicator of Agency MBS performance, and also the starting point of mortgage rate diffusion for option pricing. Although MSCI can access current coupon data from Reuters, it has its own limitations that the proposed solution is able to overcome. This specification describes MSCI's current coupon marking methodology for the relevant agency pass-through types based on TBA prices. The methodology is implemented in python and can be run as a daily process to feed a database with the most recent current coupon values.

  13. BLOG

    Coronavirus and a potential MBS convexity whipsaw 

    Mar 6, 2020 Yihai Yu

    Risk Management

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    Amid rising fears that the human toll of coronavirus will have a significant impact on the global economy, investors have sought safety in Treasurys and driven yields to all-time lows. This rate rally has posed a hedging challenge for investors in mortgage-backed securities.

  14. BLOG

    MBS prepayment in 2020: Looking back, looking ahead 

    Jan 21, 2020 Yihai Yu

    Fixed Income , Risk Management

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    Drawing on two decades of U.S. data on MBS prepayment and borrower incentives to refinance, we used our model to look at three potential prepayment themes for 2020.

  15. PAPER

    Notes on MSCI Agency Prepayment Model for Reperforming Mortgages 

    Dec 31, 2019 Yihai Yu

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  16. PAPER

    MSCI Agency Credit Risk Transfer (CRT) Models 

    Sep 30, 2019 Yihai Yu

    Risk Management , Factor and Risk Modeling

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    The Credit Risk Transfer (CRT) programs from Fannie Mae and Freddie Mac aim to shift mortgage credit risk from the Enterprises to private investors, with cumulatively $2.8 trillion loans covered so far. To facilitate these capital market transactions since 2013, the Enterprises have disclosed about 20 years of monthly credit performance data on almost 50 million loans, with a detailed voluntary prepayment history, delinquency and foreclosure status data, as well as an actual loss breakdown. This paper focuses on the model insight extracted from this rich dataset and provides details of the MSCI CRT model.

  17. BLOG

    A reality check for MBS duration risk 

    Aug 15, 2019 Yihai Yu

    Risk Management , Fixed Income , Models/Client Cases

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    Empirical duration data can be used to check whether models for mortgage-backed securities are accurately measuring interest-rate risk.

  18. BLOG

    Fed policy, the credit cycle and real estate 

    May 28, 2019 David Zhang , Yihai Yu

    Risk Management , Real Estate Investing , Fixed Income

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    Amid the uncertainty over Federal Reserve policy, investors in commercial real estate (CRE) are confronting asset-allocation challenges and growing concerns about CRE valuation and debt levels, after an extended period of easy credit.

  19. BLOG

    Are you ready for uniform MBS? (Part 2) 

    Apr 26, 2019 Yihai Yu

    Models/Client Cases , Fixed Income , Risk Management

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    Aligning prepayment speeds of Fannie Mae and Freddie Mac securities presents a major challenge to the success of uniform mortgage-backed securities (UMBS), which the two government-sponsored enterprises will launch on June 3.

  20. BLOG

    Are You Ready For Uniform MBS? (Part 1) 

    Apr 8, 2019 Yihai Yu

    Models/Client Cases , Fixed Income , Risk Management

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    Fannie & Freddie will conclude Single Security Initiative (SSI) June 3, 2019, creating a single to-be-announced (TBA) market & a new TBA security: the uniform mortgage-backed security (UMBS)

  21. PAPER

    MSCI Current Coupon Models 

    Mar 18, 2019 David Zhang , Yihai Yu

    Factor and Risk Modeling , Risk Management

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    This paper describes the MSCI Current Coupon Model.

    The future cashflow of mortgage-backed securities (MBS) is uncertain due to the embedded prepayment option. The prepayment decisions of borrowers are largely driven by the prevailing mortgage rates in the future. Mortgage rates are derived from current coupon rates. Near-term current coupon yield can be derived from the secondary TBA passthrough market, but the liquidity does not go beyond 3 months. To evaluate a typical MBS with a 30-year time horizon, a stochastic term structure model produces the distribution discount factors and swap rates, with proper calibration to the forward curve and volatility surface. A current coupon model is then needed to generate the distribution of current coupon rates (and subsequently mortgage rates) to evaluate the prepayment incentives along the paths of Monte Carlo simulations. The MSCI Current Coupon Model takes advantage of both empirical regression and risk-neutral valuation approaches to construct a more parsimonious and computationally efficient model. This Model Insight documents the details of the MSCI Current Coupon Model to help clients understand the model and gain more intuitive insights into the MSCI securitized products model suite.

  22. BLOG

    How mortgage fees affect rates and spreads 

    Feb 7, 2019 Yihai Yu

    Models/Client Cases , Real Estate Investing , Fixed Income

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    How could potential changes in U.S. mortgage policy and possible long-term industry trends affect mortgage-related fees and rate spreads?

  23. BLOG

    Managing MBS risk in a rising rate environment (Part 2) 

    Nov 21, 2018 Yihai Yu

    Fixed Income , Risk Management

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    Will U.S. homeowners slow down the heady prepayment rate on their mortgages — even if interest rates remain unchanged, thus potentially harming returns of mortgage-backed securities (MBS) and extending the duration of these securities?

  24. PAPER

    MSCI Primary - Secondary Mortgage Spread Model 

    Nov 12, 2018 Yihai Yu

    Factor and Risk Modeling , Risk Management

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    This paper describes the MSCI Primary/Secondary Mortgage Spread Model.

    Home purchases in US are mostly funded by the capital market. Borrowers get mortgages from lenders, paying interest at a primary mortgage rate. These loans are usually securitized into agency mortgage-backed securities (MBS) in the secondary market, in which the daily current coupon yield can be computed. The spread between the primary mortgage rate and the MBS yield is called the primary/secondary (P/S) spread. The P/S spread consists of a GSE guarantee-fee and lender cost/profit.

  25. Two types of prepayment risk challenge the MBS investor: contraction and extension. Contraction risk arises as prepayment increases, and extension risk occurs when prepayment decreases. Contraction risk had been the dominating concern as the global fixed income market experienced a secular rally for 35 years. Now, as mortgages rates are rising, extension is now on the investor’s radar, and this requires a solid understanding of base prepayment speeds. We present a detailed decomposition of base prepayment speed and specifications of our new MSCI agency fixed rate base prepayment model.

  26. The greatest MBS prepayment risk is driven by borrowers’ economic incentive to lower their monthly payments, i.e., to refinance their existing mortgage to lower mortgage rates. For the past 20 years, the shape of the refinance S-curve has changed numerous times due to prepayment regime shifts driven by new government policies/programs, changing underwriting standards, the housing price cycle, consumer behavior adjustments, and technology advancements. An accurately calibrated and well-behaved refinance prepayment model is critical for MBS valuation and risk management. This Model Insight details how the MSCI Fixed Rate Prepayment Model captures the complex dynamics of refinance behavior in a consistent and responsive way.

  27. BLOG

    Managing MBS risk in a rising rate environment (Part 1) 

    Sep 17, 2018 Yihai Yu

    Fixed Income , Risk Management

    Learn More

    Bond investors lost $1 trillion during “the great bond massacre”1 of 1994, which was triggered by the Federal Reserve’s aggressive tightening of interest rates. Many U.S. mortgage-backed securities (MBS) investors and broker-dealers misjudged the risk that fixed-rate prime mortgage borrowers would defer prepayments due to market conditions. This risk — known as “extension risk” — means that borrowers may hold onto mortgages longer than previously expected.

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