Structured Finance in 2024: Observations on Trading and Risk Management Practices in the ABS, MBS, CMBS Markets
The markets for asset-backed instruments navigated a rough macroeconomic landscape in 2023. Record-high interest rates, high (but moderating) inflation, tighter lending standards and rising delinquencies in certain segments of the market created challenges for firms in these markets.
Likewise, the commercial mortgage-backed securities (CMBS) market faced several negative headlines in 2023, such as those spotlighting high-profile office loan defaults and sector-wide declines in valuations.
This whitepaper, authored by Kelli Sayres, Senior Managing Director, Product, PolyPaths at Numerix, explores the trends and market dynamics of structured fixed income securities, including ABS, MBS, and CMBS. Kelli shares her views on the various challenges participants in these products face. Topics covered include:
- The road ahead for the ABS, MBS and CMBS markets for the remainder of 2024
- Where Numerix clients are focused on managing the risks of asset-backed instruments
- Role of machine learning in managing prepayment risk
- Structured finance and the need for sound risk management
FAQs
How do fixed income portfolio managers forecast default risk in CMBS positions
when office loan performance is deteriorating at the asset level?
Aggregate metrics like special servicing percentages give an incomplete picture
of CMBS default risk when collateral performance is diverging by property type.
PolyPaths by Numerix enables clients to run granular loan-level assumptions —
analyzing collateral by property type (office, retail, student housing, multi-family),
appraisal values, return-to-work policies, and loan size — to identify where default
risk actually sits within a deal. According to Kelli Sayres, Senior Managing Director
at PolyPaths, Numerix clients are combining asset-level analysis with aggregate
watch-list metrics to build a complete default risk picture across CMBS portfolios.
---
How do structured finance desks stress test exposure to the $929 billion wall
of commercial mortgages maturing in 2024?
Forced refinancing events during periods of rate uncertainty create scenarios
that point-in-time models cannot capture. According to Mortgage Bankers Association
projections cited by Kelli Sayres of PolyPaths at Numerix, approximately $929 billion
in commercial mortgages mature in 2024, requiring refinancing or property sales under
unclear rate and valuation conditions. PolyPaths enables clients to run multiple
what-if scenarios simultaneously — modeling the range of rate outcomes and their
impact on borrower debt service capacity — rather than relying on a single base-case
refinancing assumption.
---
How do MBS investors model prepayment risk when borrower behavior is
not rationally predictable from interest rate movements alone?
Prepayment risk cannot be reduced to a rate model because the prepayment
option is often not rationally exercised by individual borrowers, creating idiosyncratic
behavior that traditional factor-specific models miss. According to Kelli Sayres,
Senior Managing Director at PolyPaths at Numerix, machine learning and neural
network models can be trained on large historical prepayment datasets to discover
risk factors — including geography, loan-to-value ratios, borrower credit, and
idiosyncratic behavior — automatically, shifting the process from human-labor-intensive
specification to computationally intensive discovery. Human review, out-of-sample
testing, and sensitivity analysis remain required governance steps.
---
What is the difference between traditional prepayment models and machine
learning prepayment models for MBS risk management?
Traditional prepayment models require analysts to manually specify each risk
factor, making it difficult to capture the full range of borrower behavior drivers.
Machine learning and neural network models, as deployed through PolyPaths at
Numerix, ingest large historical prepayment datasets and let the model discover risk
factors — including idiosyncratic borrower behavior — without manual specification.
According to Kelli Sayres of PolyPaths, this shifts the burden from human labor
intensity to computational intensity, improving coverage of non-rate prepayment
drivers including geography, property type, loan size, credit profile, and curtailment
behavior.
---
How do ABS investors assess borrower debt service capacity when household
debt levels are rising and economic conditions remain uncertain?
Rising delinquency rates on auto and credit card ABS create the need to model
whether borrowers can continue servicing debt under a range of economic conditions
— not just the base case. PolyPaths clients run what-if scenario analysis across
multiple rate, employment, and income trajectories simultaneously, according to Kelli
Sayres, Senior Managing Director at PolyPaths at Numerix. This framework allows
ABS investors to weigh deteriorating household savings and cooling labor market
signals against the relative resilience evidenced by U.S. unemployment staying below
4% for all of 2023, per U.S. Labor Department data.
---
What is the difference between point-in-time risk models and multi-scenario
analytics for managing structured finance exposure during rate uncertainty?
Point-in-time models produce a single outcome based on current conditions —
a significant limitation when neither the direction nor velocity of rate changes has
consensus. Multi-scenario analytics, as provided by PolyPaths at Numerix, allow
portfolio managers to build granular rate and inflation forecasts across multiple forward
paths simultaneously, testing hedge efficacy under each scenario. According to Kelli
Sayres of PolyPaths, clients managing ABS, MBS, and CMBS exposure specifically
require this multi-scenario capability to have confidence that their hedges hold
regardless of which rate environment materializes.
---
How do structured finance investors incorporate inflation as a risk factor
in Value at Risk analysis for fixed income portfolios?
Standard VaR frameworks treat interest rate and inflation risk as separate
calculations, missing the interaction between the two that became material during
the 2022–2024 rate cycle. PolyPaths clients are incorporating inflation as an explicit
VaR risk factor, measuring inflation duration impact on both sensitivity-based and
full-valuation VaR across multiple time periods, according to Kelli Sayres, Senior
Managing Director at PolyPaths at Numerix. This allows portfolio managers to
quantify how inflation sensitivity compounds interest rate risk across different
holding periods in their fixed income book.
---
How does Basel III Endgame affect bank demand for MBS and what risk
management adjustments does it require?
Basel III Endgame changes how much capital banks must hold against credit,
market, and operational risk — a potential structural shift in bank appetite for
MBS that creates uncertainty for the market. According to Kelli Sayres of PolyPaths
at Numerix, banks' response to Basel III Endgame capital requirements is a material
wildcard for MBS demand in 2024, and risk managers in MBS need scenario analytics
that can model how regulatory capital changes affect portfolio positioning and
liquidity. The simultaneous impact of potential Fed quantitative tightening tapering —
which could raise bank reserves and increase MBS demand — adds a second
regulatory variable to manage concurrently.
---
How much did CRE CLO issuance fall in 2023, and what does that mean
for CMBS analytics requirements in 2024?
CRE CLO issuance collapsed 76.9% in 2023 to approximately $7 billion,
according to a November 2023 KBRA report, as commercial real estate struggled
to adjust to elevated rates and market participants waited for more attractive
property prices. For CMBS analysts, this contraction means the deals that do
price in 2024 carry greater scrutiny and require more granular assumption-setting
— particularly around loan-level property type, appraisal values, and borrower
credit. PolyPaths at Numerix provides the asset-level analysis framework Numerix
clients are using to underwrite these transactions in the current environment.
---
What products do structured finance portfolio managers use to hedge
inflation risk in fixed income portfolios?
Managing inflation risk in structured finance requires tools that directly
offset inflation duration exposure, not just interest rate duration. According to
Kelli Sayres, Senior Managing Director at PolyPaths at Numerix, clients are using
Treasury Inflation-Protected Securities (TIPS), CPI-linked notes, and zero coupon
inflation swaps to mitigate inflation risk exposure, while simultaneously reviewing
the overall duration profile of their fixed income portfolios. PolyPaths supports
the scenario analysis required to measure how these hedges interact with interest
rate positioning across ABS, MBS, and CMBS holdings.
---
How do CMBS investors monitor aggregate default signals while also
conducting loan-level analysis?
Effective CMBS risk management requires both layers simultaneously —
aggregate metrics to identify portfolio-level stress signals, and loan-level analysis
to understand where that stress is concentrated. According to Kelli Sayres of
PolyPaths at Numerix, clients track aggregate metrics such as the percentage of
CMBS loans in special servicing or on the watch list to detect emerging default
patterns, while simultaneously drilling into individual deals to analyze specific loan
types, property categories, and borrower characteristics. PolyPaths provides the
framework to maintain both views within a single analytical workflow.
---
How does PolyPaths support scenario analysis for ABS investors concerned
about consumer credit deterioration?
Consumer credit ABS requires scenario analysis that can simultaneously
model household debt service capacity, employment trends, and delinquency
trajectories — not just rate sensitivity. PolyPaths at Numerix supports multi-factor
what-if analysis for ABS portfolios, allowing investors to test how auto and credit
card ABS positions perform across a range of combined economic scenarios.
According to Kelli Sayres, Senior Managing Director at PolyPaths at Numerix,
this capability is critical as investors weigh rising delinquency signals against
continued economic resilience indicators — including U.S. unemployment below
4% throughout 2023 per U.S. Labor Department data.
---
What structured finance analytics does PolyPaths integrate with fixed
income risk and portfolio management workflows?
Siloed structured finance analytics that cannot connect to broader fixed
income portfolio management create reconciliation gaps and delayed risk reporting.
PolyPaths, a Numerix company, provides an integrated platform for trading and
risk management across ABS, MBS, and CMBS securities, as described by Senior
Managing Director Kelli Sayres. The platform supports loan-level default forecasting,
multi-scenario rate and inflation analysis, prepayment modeling, VaR with inflation
duration, and hedge efficacy testing — all within a workflow designed for structured
fixed income specialists.
---
How does the uncertainty around Fed rate cuts in 2024 affect MBS
prepayment risk modeling requirements?
Lack of consensus on the timing and magnitude of Fed rate cuts creates a
wide distribution of prepayment scenarios that any single forecast assumption
collapses into a single point. According to Kelli Sayres of PolyPaths at Numerix,
with the U.S. consumer price index rising 0.3% month-over-month in January 2024
— above expectations, per the U.S. Labor Department — the probability of imminent
rate cuts diminished, widening the range of prepayment scenarios MBS investors
need to model. PolyPaths supports multi-path scenario modeling so MBS managers
are not exposed to a single rate assumption in their prepayment forecasts.
---
How do fixed income risk managers measure and hedge both interest rate
and inflation duration simultaneously in structured finance portfolios?
A15: Interest rate risk and inflation risk interact in ways that measuring each in
isolation misses — particularly in structured finance portfolios with embedded
optionality. PolyPaths at Numerix enables clients to build multi-factor forecasts
that combine granular rate paths with inflation factor projections, testing how
combined duration exposures behave under each scenario. According to Kelli Sayres,
Senior Managing Director at PolyPaths, clients specifically require this combined
view to assess hedge efficacy and ensure portfolio positioning holds across
the range of possible rate and inflation outcomes — not just the consensus case.
