CoachA prepayment is a repayment of mortgage principal ahead of the amortisation schedule: a sale of the house, a refinancing, a partial repayment, or a default bought out of the pool by the guarantor. The conditional prepayment rate (CPR) is the annualised fraction of the balance, after scheduled principal, prepaid in a month; the monthly fraction, the single monthly mortality, is . The PSA benchmark is a standard speed path: 100% PSA is a CPR of 0.2% in a loan’s first month, rising by 0.2% a month to 6% in its thirtieth and constant after; 200% PSA doubles every rate.
Examples
Example 12.3 (A new pool)
USD 100 million of new thirty-year 6.5% loans back a 6% pass-through. The level monthly payment is USD 632 068; in the first month it contains USD 541 667 of interest and USD 90 401 of scheduled principal, and at 100% PSA (a CPR of 0.2%) USD 16 667 is prepaid. Investors receive USD 500 000 of interest, the 6% coupon, and all USD 107 068 of principal. The weighted average life, the average time to the return of a dollar of principal, is 19.6 years with no prepayment, 11.5 at 100% PSA and 5.8 at 300%.