27 March 2015 US Fixed Income Weekly A final caveat One aspect that this framework does not control for (which may impact valuation slightly) is differences in the TBA collateral characteristics between Ginnie Mae II and Fannie Mae, such as WAC, WALA and geographic concentration. For example, the model loads FNCL 4.5%s at 4.85 GWAC, and G2SF 4.5%s at 4.96 GWAC. Fair value in spec: pools In specified pools, a careful statistical analysis suggests that 4.5% coupons may be undervalued across loan balance stories, while CR pools may be overvalued across 3.0% through 4.5% coupons (Figure 7). Loan balance and CQ 4.0%s also look undervalued in our model—but not to such a significant extent that we can rule out model error. Hedge-adjusted carry over TBA also continues to improve in higher coupons, with 4.5% loan balance and high-LTV pools projecting 4/32s to 6/32s of advantage, and loan balance 4.0%s around 1/32 to 2/32s. The model fair value for high-LTV pools is the result of a new permutation of our model building on the previous work done on loan balance pay-ups. (Figure 7: Modeling spec pay-ups suggests 4.5%s undervalued, CR overvalued Type Cpn Act Px Mdl Px Act-Mdl ZScore HAC 3.00 -0-060 -0-113 0-053 0.5 -0-004 CO 3.50 0.280 0.176 0.102 1.2 -0.025 4.00 1-260 2-011 -0.071 -0.6 0-001 4.50 3-000 3-02 5 -0-02 5 -0.2 0.051 CR 3.00 -0-06 0 -0-28 3 0-22 3 2.3 -0-010 3.50 0-240 0.103 0-135 1.5 -0-036 4.00 1-220 1-063 0-15 5 1.3 0-00 2 4.50 3-000 2-100 0-220 2.3 0-067 LLB 3.00 0.080 0-181 -0-101 -1.2 -0-010 3.50 1-04 0 1-03 7 0-001 0.0 -0-03 6 4.00 2-040 2-103 -0-063 -0.9 O-001 4.50 3-000 5-044 -2-044 -8.4 0-046 MLB 3.00 0-060 0-110 -0-050 -1.0 -0-005 3.50 0-300 0-286 0-012 0.2 -0-025 4.00 1-260 2.001 -0-061 -0.9 O-023 4.50 2-22 0 4-156 -1-25 6 -7.3 O-042 HLB 3.00 O-040 0-067 -O-027 -0.8 -0-000 3.50 O-180 O-182 -0-002 -0.1 -0-024 4.00 1-100