Finance:PSA prepayment model
The PSA prepayment model is a prepayment scale developed by the Public Securities Association in 1985 for analyzing American mortgage-backed securities. The PSA model assumes increasing prepayment rates for the first 30 months after mortgage origination and a constant prepayment rate thereafter.[1] This approximates real-world experience that during the first few years, mortgage borrowers:
- Are less likely to relocate to a different home,
- Are less likely to refinance into a new mortgage, and
- Are less likely to make extra payments of principal.
The standard model (also called "100% PSA") works as follows: Starting with an annualized prepayment rate of 0.2% in month 1, the rate increases by 0.2% each month, until it reaches 6% in month 30. From the 30th month onward, the model assumes an annualized prepayment rate of 6% of the remaining balance.[2] Each monthly prepayment is assumed to represent full payoff of individual loans, rather than a partial prepayment that leaves a loan with a reduced principal balance.
Variations of the model are expressed in percent, e.g., "150% PSA" means a monthly increase of 0.3% in the annualized prepayment rate, until the peak of 9% is reached after 30 months. The months thereafter have a constant annualized prepayment rate of 9%.
1667% PSA is roughly equivalent to 100% prepayment rate in month 30 or later.
References
- ↑ "Calculation Standard Set on C.M.O. Yields". The New York Times. June 14, 1985. https://www.nytimes.com/1985/06/14/business/finance-new-issues-calculation-standard-set-on-cmo-yields.html.
- ↑ Hayre, Lakhbir, Salomon Smith Barney Guide to Mortgage-Backed and Asset-Backed Securities (Wiley: 2001) ISBN:978-0-471-38587-5, p. 24.
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