Mortgage Industry Advisory Corp. has made software widely available for valuing "hybrid" adjustable-rate mortgages.
The New York-based risk management consulting firm developed the analytical software for individual clients over the last year and recently incorporated it into its basic package.
Hybrid ARMS are "the most popular new product we've seen in the last five years," said Michael LaCour-Little, director of financial research at Citicorp Mortgage and a user of MIAC's tools.
In 1995 and 1996 hybrids accounted for about half of Citicorp's originations, he recalled.
In a hybrid ARM, a borrower pays a fixed rate for several years before the loan converts to an adjustable rate. This has proved more attractive to borrowers than balloon mortgages, which must be refinanced every few years, Mr. LaCour-Little said.
But because hybrids are generally held by banks in their portfolios rather than securitized, little information is available about their prepayment behavior, said Paul Van Valkenburg, a principal at MIAC.
"To value these, you need flexibility in your prepayment model," said Robert Husted, Mr. Van Valkenburg's partner.
To that end, MIAC designed its analytics to be compatible with the prepayment models of other software vendors like Risk Monitors and Andrew Davidson & Co. Also, users of MIAC's model can change the underlying assumptions to reflect their own opinions about prepayments.