Prepayment speed

Prepayment speed

Also called speed, the estimated rate at which mortgagors pay off their loans ahead of schedule, critical in assessing the value of mortgage pass-through securities.

Prepayment Speed

In mortgage-backed securities, the estimated rate at which mortgage borrowers will pay off the mortgages that underlie an MBS. The equivalent of the coupon on a mortgage-backed security is a percentage of the interest and principal paid on the mortgages backing the security. A risk associated with mortgage-backed securities is that too many homeowners will pay off their mortgages with too much prepayment speed, depriving the holders of the MBS from future coupon payments.
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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.