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

1. "Calculation Standard Set on C.M.O. Yields". The New York Times. June 14, 1985.
2. Hayre, Lakhbir, Salomon Smith Barney Guide to Mortgage-Backed and Asset-Backed Securities (Wiley: 2001) ISBN 978-0-471-38587-5, p. 24.