FICC Focus Metacapital’s Narula on Mortgage Market Shakiness: Credit Crunch
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Apr 10, 2025 Deepak Narula, founder and co-CIO of Metacapital Management, dives into the mortgage market's potential upheaval. He discusses the impact of new tariffs, the privatization of Fannie Mae and Freddie Mac, and the negative convexity profile of mortgage-backed securities. Narula also addresses the risks of prepayment and stagflation while highlighting the opportunities presented by machine learning models. The conversation offers a glimpse into navigating current economic challenges and the evolving landscape of housing finance.
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Origin of Metacapital Fund
- Deepak Narula started Metacapital after leaving Lehman Brothers during its strategic shift in 2000.
- He partnered with John McDonald, combining trading skills and sales expertise to launch their fund.
What is an MBS?
- Mortgage-backed securities are pools of home loans transformed into bonds with government guarantees.
- The key challenge is modeling prepayments since homeowners can pay off loans early without penalty in the US.
Challenges in Prepayment Modeling
- Prepayment modeling uses large datasets and econometric techniques to predict how millions of borrowers behave.
- Despite sophisticated models, borrower behavior changes over time, causing frequent surprises in prepayment rates.