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Prepayment speed

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Definition of Prepayment speed

Prepayment Speed Image 1

Prepayment speed

Also called speed, the estimated rate at which mortgagors pay off their loans ahead of
schedule, critical in assessing the value of mortgage pass-through securities.



Related Terms:

Mortgage duration

A modification of standard duration to account for the impact on duration of MBSs of
changes in prepayment speed resulting from changes in interest rates. Two factors are employed: one that
reflects the impact of changes in prepayment speed or price.


PSA

A prepayment model based on an assumed rate of prepayment each month of the then unpaid principal
balance of a pool of mortgages. PSA is used primarily to derive an implied prepayment speed of new
production loans, a 100% PSA assumes a prepayment rate of 2% per month in the first month following the
date of issue, increasing at 2% per month thereafter until the 30th month. Thereafter, 100% PSA is the same as
6% CPR.


Speed

Related:prepayment speed


Steady state

As the MBS pool ages, or four to six months after it was passed at least once through the
threshold for refinancing, the prepayment speed tends to stabilize within a fairly steady range.


FHA prepayment experience

The percentage of loans in a pool of mortgages outstanding at the origination
anniversary, based on annual statistical historic survival rates for FHA-insured mortgages.



Lag response of prepayments

There is typically a lag of about three months between the time the weighted
average coupon of an MBS pool has crossed the threshold for refinancing and an acceleration in prepayment
speed is observed.


Prepayment

A payment made in advance of when it is treated as an expense for profit purposes.


Prepayment Speed Image 2

Prepayments

Payments made in excess of scheduled mortgage principal repayments.


Zero prepayment

assumption The assumption of payment of scheduled principal and interest with no payments.



 

 

 

 

 

 

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