While I can identify them and use them to solve problems, the defintion of SMM and PSA seem the same, and I find it hard to see the difference: SMM: “We can convert the CPR into a monthly prepayment rate called the SMM.” PSA: “The PSA benchmark is expressed as a monthly series of CPRs.” Can someone help identify the difference?
SMM is used to help calculate the amount of prepayment in a given month. PSA is a multiplier of industry standard prepayment assumptions (increases by 0.2% every month for the first 30 months).
hey bpdulog. youre right and i was aware of that. ive been able to solve problems using qhat u said. however if you look at the definitions dont they sound the same? The PSA seems more like “an adjustment factor to CPR” rather than a monthly series of CPRs.
Tenten, That’s exactly what PSA is, it’s an adjustment factor. Basically it says that prepayments are slower in the early years or months and it adjusts CPR to reflect that fact. It’s logic is this, when you first buy a home you’re not going to refinance right away. Who the hell wants to go thru that hassle all over again so soon? Not too many people. Plus you’re not going to refinance if int rates haven’t declined or your credit hasn’t improved. So that’s why it takes some time for prepayments to start to speed up over the life of the passthru security
everything you guys are saying is accurate and makes sense. my only point is that the defintion of PSA does not sound like what it actually is (an adjustment to CPR to reflect the increasing prepayment rates as the mortgage ages). Again… PSA: “The PSA benchmark is expressed as a monthly series of CPRs.”