CoachThe current coupon is the yield of a to-be-announced mortgage security priced at par, interpolated between the coupons that trade. The primary–secondary spread is the mortgage rate offered to borrowers (the primary market) minus the current coupon (the secondary market): the lenders’ and guarantors’ margin, which widens when origination capacity is scarce (in 2020 it ran 73 to 81 basis points above what demand explained, from March to September). A prepayment model maps the rate paths to borrowers’ mortgage rates through both; the chapter uses the ten-year par swap rate plus a fixed 175 basis points.
