Single Monthly Mortality - SMM

AAA

DEFINITION of 'Single Monthly Mortality - SMM'

In mortgage-backed securities (MBSs), this is the percentage of the principal amount of mortgages that are prepaid in a given month. For investors of MBSs, prepayment of mortgages is usually undesirable since future interest is foregone.


This is more broadly referred to as "prepayment risk." Due to the importance of prepayment risk, single monthly mortality was developed as a metric for tracking prepayments in the mortgage pool.

INVESTOPEDIA EXPLAINS 'Single Monthly Mortality - SMM'

Prepayment hinders the returns for MBS investors because mortgages are normally prepaid using refinancing loan, and this happens primarily when interest rates have fallen. So while an investor in an MBS believes they have locked in a higher yielding investment in a low rate environment, they may in fact have the carpet pulled out from under them.


The mortgage holders in the MBS may refinance at lower interest rates, and then pay off the mortgage in the MBS pool. Now the investor has their money back and must reinvest the funds in a lower interest rate environment.

RELATED TERMS
  1. Mortgage Putback

    The forced repurchase of a mortgage by an originator from the ...
  2. Prepayment

    The satisfaction of a debt or installment payment before its ...
  3. Prepayment Risk

    The risk associated with the early unscheduled return of principal ...
  4. Prepayment Model

    A model used to estimate the level of prepayments on a loan portfolio ...
  5. Refinancing Risk

    1. The risk that an early unscheduled repayment of principal ...
  6. Mortgage-Backed Security (MBS)

    A type of asset-backed security that is secured by a mortgage ...
RELATED FAQS
  1. Where can I find year-to-date (YTD) returns for benchmarks?

    Benchmarks are securities or groups of securities against which investment performance is analyzed. Examples of popular equity ... Read Full Answer >>
  2. What is the effective interest method of amortization?

    The effective interest method is an accounting practice used for discounting a bond. This method is used for bonds sold at ... Read Full Answer >>
  3. Under what circumstances would someone enter into a repurchase agreement?

    In finance, a repurchase agreement represents a contract between two parties, where one party sells a security to the other ... Read Full Answer >>
  4. What type of asset allocation should I use if I am already retired?

    Among investors, asset allocation is a topic of discussion that receives a great deal of weight during the asset accumulation ... Read Full Answer >>
  5. What are some examples of smart beta ETFs that use passive and active management?

    There are a number of smart beta exchange-traded funds (ETFs) that use passive and active management, including the WisdomTree ... Read Full Answer >>
  6. How does implied volatility impact the pricing of options?

    Implied volatility is an important aspect of the time value premium of an option. As implied volatility increases, call and ... Read Full Answer >>
Related Articles
  1. Insurance

    Fannie Mae and Freddie Mac, Boon Or Boom?

    These two companies are crucial to the mortgage market, but are they ticking timebombs?
  2. Bonds & Fixed Income

    Profit From Mortgage Debt With MBS

    Mortgage-backed securities can offer monthly income, a fixed interest rate and even government backing.
  3. Insurance

    Behind The Scenes Of Your Mortgage

    Four major players slice and dice your mortgage in the secondary market.
  4. Bonds & Fixed Income

    The Risks Of Mortgage-Backed Securities

    Find out how weighted average life guards against prepayment risk.
  5. Personal Finance

    Why Are Mortgage Rates Increasing?

    Learn how the secondary mortgage market and investor demand affect the cost of home ownership.
  6. Personal Finance

    The Fuel That Fed The Subprime Meltdown

    Take a look at the factors that caused this market to flare up and burn out.
  7. Economics

    What's a Maturity Date?

    Maturity date is the final date when any remaining principal and any unpaid interest are due on a debt.
  8. Professionals

    Worried About Stocks? Try on Convertibles

    Convertibles are a good hedge against equity market risk (if you're o.k. with losing a bit of upside potential).
  9. Stock Analysis

    Playing Rising Rates with Ultra-Short Term Bonds

    With rising rates likely, investors may want to consider adding a dose of ultra-short bonds to their portfolios. Here are some ETFs to consider.
  10. Professionals

    Why Investors Are Bailing on Bond ETFs

    Investors are fleeing bond ETFs. Should you follow the herd? Hint: It depends on the type of bond.

You May Also Like

Hot Definitions
  1. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  2. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  3. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
  4. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  5. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
  6. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!