DEFINITION of 'Constant Percent Prepayment'
Annualized estimate of mortgage loan prepayments, computed by multiplying the average monthly prepayment rate by 12. This is used to determine cash flow in structured finance transactions, often referred to as the secondary mortgage market. It models the risk of unscheduled return of principal, which affects fixed income returns.
BREAKING DOWN 'Constant Percent Prepayment'
Market data suggests that the average mortgage is paid off in its 12th year, which leads to assumption of "12-year-prepaid life." Yields are based on assumed prepayment rates. Among the most active participants in the secondary market are Fannie Mae and Freddie Mac, both of which are government-sponsored enterprises.