- 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 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.
Using the PSA benchmark, CPR = 6% * t/30
For month 10,
CPR = 6% * 10/30 = 2%
SMM = 1 – (1 – 2%)^(1/12) = 0.17%
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%