Using a 20-year time series of Wall Street dealers' forecasts of the prepayment speed
of federally guaranteed mortgage-backed securities, the authors explore this question.
Under all prepayment speed
scenarios, the cash flows demonstrate that the assets in the indenture are sufficient to make debt service payments throughout the term of the bonds.
When interest rates are falling, homeowners tend to pay off their mortgages early (usually by refinancing at a lower rate), causing the prepayment speed
to be faster than expected.
But equity researchers from several large brokerages have been studying prepayment speed
behavior for several years, and my reading of their findings thus far indicates there is no correlation between prepayment speeds
and the amount of servicing fee on a loan.
CASH FLOW SUFFICIENCY: Stressed cash flows demonstrate that under the most stressful (20% percent) prepayment speed
there are sufficient funds to pay debt service on the class I and II bonds, but rely on the general fund to pay debt service on a portion the class III bonds.
These assumptions are derived using the pool's 12-month average prepayment speed
, default frequency, loss severity, and delinquency trend.
Marketswitch's technology, which has been licensed exclusively to OptiFI, merges household-level behavioral analysis with financial security pricing technology to unlock the value of understanding the effect of unique customer attributes on prepayment speed
, according to Fair, Isaac and Marketswitch.
The ratio of the prepayment speed
for each state cluster to the national average for its coupon/origination cohort was calculated.
The average prepayment speed
for the state of California stood at 10.
As all mortgage servicers know, it does not matter what single prepayment speed
is used, but how the prepayment speeds
are expected to change as interest rates change.
The aggregate 30 year Fannie Mae prepayment speed
rose 34% to 23.
That is, where the average PSA (a measurement of prepayment speed
created by the Public Securities Association) is 300, one firm may project 400, another 200; quite a wide range and one that can have a huge impact on remaining life.