The PSA Prepayment Model is a
prepayment scale developed by the
Public Securities Association in 1985 for analyzing American
mortgage-backed securities
A mortgage-backed security (MBS) is a type of asset-backed security (an 'instrument') which is secured by a mortgage or collection of mortgages. The mortgages are aggregated and sold to a group of individuals (a government agency or investment ba ...
. The PSA model assumes increasing prepayment rates for the first 30 months after mortgage origination and a constant prepayment rate thereafter. 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.
[Hayre, Lakhbir, ''Salomon Smith Barney Guide to Mortgage-Backed and Asset-Backed Securities'' (Wiley: 2001) , p. 24.] 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
Mortgage-backed security
Fixed income analysis
Financial models
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