PSA prepayment model
PSA Prepayment Model is a prepayment model by the PSA (Public Securities Association) that assumes increasing prepayment rates for the first 30 months of the lifetime and constant rates thereafter. Real world experience shows that during the first few years borrowers
- are less likely to move to a different home,
- they are less likely to refinance and that
- their financial situation is too strapped to allow for additional payments.
The standard model (also called "100 percent PSA") works as follows: starting with an annualized prepayment rate of 0% in month 0, the rate will increase by 0.2% each month, until it peaks at 6% after 30 months. From the 30th month on the model assumes an annual constant prepayment rate of 6%.
Variations of the model are expressed in percent, e.g., a 150% model means a monthly increase by 0.3%, until the peak of 9% is reached after 30 months. The months thereafter will have a constant annual prepayment rate of 9%.
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