Public Securities Association Standard Prepayment Model - PSA

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DEFINITION of 'Public Securities Association Standard Prepayment Model - PSA'

An assumed monthly rate of prepayment that is annualized to the outstanding principal balance of a mortgage loan. The Public Securities Association Standard Prepayment model (PSA) is one of several models used to calculate and manage prepayment risk. The PSA model acknowledges that prepayment assumptions will change during the life of the obligation and affect the yield of the security. The model assumes a gradual rise in prepayments, which peaks after 30 months. The standard model, called "100 percent PSA," starts with an annualized prepayment rate of 0% in month zero, with 0.2% increases each month until peaking at 6% after 30 months.

Also called "PSA prepayment model."

BREAKING DOWN 'Public Securities Association Standard Prepayment Model - PSA'

Prepayment assumptions are based on data that show during the first few years, a borrower is less likely to move to a different home, is less likely to refinance and is less likely to be able to afford additional payments. An annual conditional prepayment rate of 6% is assumed after 30 months. The Public Securities Association Standard Prepayment model was developed by the Public Securities Association (PSA). The PSA eventually became the Bond Market Association, and in 2006, after merging with the Securities Industry Association, become the Securities Industry and Financial Markets Association (SIFMA).

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