The PSA Prepayment Model is a prepayment scale developed by the Public Securities Association in 1985 to analyze US mortgage-backed securities. The PSA model assumes an increase in the advance payment rate for the first 30 months after the mortgage origination and the prepaid rate is constant thereafter. This is close to real-world experience that during the first few years, mortgage borrowers:
- tend to move to a different house,
- is unlikely to refinance to a new mortgage, and
- tend not to make additional principal payments.
The standard model (also called "100% PSA") works as follows: Starting with an annual prepayment rate of 0.2% in month 1, rates increase 0.2% every month, up to 6% in month 30. From the 30th of the month forward, the model assumes an annual payment rate of 6% of the remaining balance. Each monthly prepayment is assumed to represent the full payment of individual loans, not partial payments that leave the loan with a reduced principal balance.
Model variation expressed in percent; for example, "150% PSA" means a monthly increase of 0.3% in annual prepayment rates, to a peak of 9% reached after 30 months. A few months later it has a constant annual payment rate of 9%.
1667% PSA is approximately equivalent to 100% payment rate at month 30 or later.
Video PSA prepayment model
References
Source of the article : Wikipedia
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