- Collateralized Mortgage Obligations (CMO) and CMO Tranches
- Stripped MBS – Interest Only (IO) and Principal Only (PO)
- Residential Non-Agency MBS
- CMBS: Structure and Call Protection
- Amortizing Loans vs. Non-Amortizing Loans
- Overview of Asset Backed Securities (ABS)
- Internal and External Credit Enhancements
- Pay-through Structures: Prepayment Tranching vs. Credit Tranching
- Home Equity Loans (HEL) Backed Securities
- Manufactured Housing Backed Loans
- Auto Loans Backed Securities
- Student Loan Backed Securities (SLABS)
- SBA Loan Backed Securities
- Credit Card Receivable Backed Securities
- Collateralized Debt Obligations (CDOs) and Synthetic CDOs
- Cash Flow Yield, Nominal Spread, and Zero Volatility Spread for ABS/MBS
- Monte Carlo Simulation for ABS/MBS
- CFA Level 2: Fixed Income Part 2 – Introduction
- Duration and Convexity for ABS/MBS
- Mortgage Cash Flow Characteristics
- Choosing an Appropriate Spread for ABS/MBS
- Mortgage Pass-through Securities: Characteristics and Risks
- Cash Flows and Prepayment Risk
- Single Monthly Mortality (SMM) & Conditional Prepayment Rate (CPR)
- PSA Prepayment Benchmark

# PSA Prepayment Benchmark

**PSA Standard Benchmark**

The Public Securities Association’s (now known as the Bond Market Association) established convention for expressing prepayments on a mortgage pass-through.

The PSA Benchmark is expressed as a series of monthly prepayment rates. It’s also referred to as a prepayment model suggesting that it can be used to estimate prepayment rates.

It assumes the following prepayment rates for a 30-year mortgage.

The first month prepayments = 1/30th of 6% (0.2%), then prepayments rise at a linear rate for 30 months. In the 30th month the prepayment rate reaches 6%. After that it maintains a 6% CPR for the remaining life of the mortgage. This benchmark is referred to as 100% PSA.

“100 PSA”: investor expectations that mortgage principal repayments in a security pool will all (100%) follow the PSA Benchmark.

The prepayment speeds can be made slow or fast by altering the percentage. If a mortgage pool is 50 PSA, then half of the mortgage prepayments are expected to follow the PSA Benchmark, i.e., 0.1% prepayment in the first month that will linearly increase to 3% in the first 30 months after which it will remain constant at 3%. 150 PSA means 1.5 times the speed of PSA benchmark (i.e., based on 9% - 6% * 1.5).

The following chart illustrates the PSA for 50 PSA, 100 PSA, and 150 PSA.

**Calculating SMM and CPR using PSA**

PSA benchmark can be used to calculate SMM and CPR. The following examples illustrates this.

**Example 1**

Using the PSA benchmark, CPR = 6% * t/30

For month 10,

CPR = 6% * 10/30 = 2%

SMM = 1 – (1 – 2%)^(1/12) = 0.17%

**Example 2**

Using 150 PSA, CPR = 9% * t/30

For month 5,

CPR = 9% * 5/30 = 1.5%

SMM = 1 – (1 – 1.5%)^(1/12) = 0.126%

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