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M ortgage valuations require the calculation of projected prepayment speeds along given interest rate paths. These paths are typically of benchmark rates such as swaps or Treasuries. However, prepayments are determined by primary market mortgage rates, as these are what the borrower sees. Given a certain path for swap or Treasury rates, how do we obtain a corresponding path for mortgage rates? Constant Spread to the 10-Year Mortgage Citigroup MOATS ModelTo overcome the limitations of these traditional approaches, Citigroup developed a new methodology called the Mortgage Option-Adjusted Term Structure (MOATS) model. 2 The MOATS model assumes a constant OAS for the current-coupon mortgagebacked security (MBS) at all times and across all interest rate paths. From this assumption, it calculates the current-coupon yield at all nodes.

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