disappear, and others’ popularity rise and fall. PCE is quicker to adjust the basket to reflect what you and I actually consume. This brings us to the second prong: Informed consumers will prefer cheaper goods to more expensive ones, given suitable substitutes. Since PCE mirrors more quickly what our new basket of goods actually holds, it tends to be several tenths of a percent lower than CPI. Question: Why do straight pass-through MBS use the prepayment model conditional prepayment rate (CPR), while their first cousin, collateralized mortgage obligations (CMO), uses the model known as the Public Securities Administration (PSA) when estimating how a given security will perform? Answer: At one point in the distant past, examiners decided that PSA was more accurate in predicting how a cohort of mortgages would prepay, so that became the standard. PSA is in fact derived from CPR and is an attempt at refining prepayment estimates based on the age of mortgages in a pool. These standards (set in the 1980s at the dawning of the mortgage derivative market and in TOFT’s heyday) have been relaxed, even though CPR/PSA information is still calculated and available for all CONTACT US TODAY! 801.676.9722 sales@thenewslinkgroup.com Your Customers Are Too. Advertising Space Available. QR Code manner of mortgage securities. Best practices can still call for documenting and modeling how a pool would perform using both methodologies. So there you have our trip down cable TV lane, compliments of the venerable USA Network. As the commissioner of sports trivia himself would sign off, “Feeling tremendous, I might add.” And if you’re so inclined, you can view some classic episodes of TOFT on YouTube. Jim Reber (jreber@icbasecurities.com) is President and CEO of ICBA Securities, ICBA’s institutional, fixed-income broker-dealer for community banks. CURRENCY | 13
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