Prepayment Assumption (tag 4518). Determines the prepayment speed and prepayment method that Eagle Accounting uses to calculate additional principal repayment in the projection of future cash flows for MBS and ABS securities. Eagle Accounting uses this value to select the prepayment speed type and prepayment value from the security master. For example, a Code Value of CPR1 tells Eagle Accounting to use the prepayment model CPR (Constant Prepayment Method), and to use a 1-month CPR speed on the security master, to forecast future cash flows (principal and interest).
Eagle Accounting supports four Prepayment Methods: ABS, CPR, PSA, and SMM. In addition Eagle Accounting allows you to utilize an Effective Maturity date.
If you set up a Processing Security Type or Security ID Level rule that is not an MBS or ABS security, Eagle Accounting forces the Prepayment Assumption value to None. This is also the default value for Prepayment Assumption.
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About the Absolute Prepayment Model (ABS)
ABS stands for the Absolute Prepayment Model. The ABS prepayment model defines an increasing sequence of prepayment rates. The ABS model is most commonly used for CARS (Certificates of Automobile Receivables) because prepayment of auto loans tend to have increasing prepayment as the loan ages or becomes seasoned.
The formula for ABS follows:
100 * SMM
ABS = ---------------------------
100 + SMM * (M-1)
Where M stands for the number of months after the loan origination. A definition of SMM follows.
The Absolute Prepayment Model (ABS') represents an assumed rate of prepayment each month relative to the original number of receivables in a pool of receivables. ABS further assumes that all the receivables in question are the same size and amortize at the same rate and that each receivable in each month of its life is either paid as scheduled or prepaid in full. For example, in a pool of receivables originally containing 10,000 receivables, a 1% ABS Rate means that 100 receivables prepay each month. ABS does not purport to be a historical description of prepayment experience or a prediction of the anticipated rate of prepayment of any pool of receivables, including the receivables.
Auto Loan ABS securities (or CARS), in general, use the ABS Prepayment Model to model the prepayment rates of CARS securities. The reason why CARS securities utilize the ABS Prepayment Model is that auto loans generally show an increasing prepayment rate as the loan ages (becomes seasoned), and the ABS Prepayment Model is able to calculate the increasing sequence of prepayment rates. Therefore, Eagle Accounting added the ABS Prepayment Model to its earnings code.
The following prepayment values are available for the ABS method when you create amortization rules.
Code Value | Code Name |
|---|---|
ABS1 | ABS |
1 Month | |
ABS12 | ABS |
12 Month | |
ABS3 | ABS |
3 Month | |
ABS6 | ABS |
6 Month | |
ABSLIFE | ABS |
Issue |
About the Constant Prepayment Rate (CPR) and Single Month Mortality (SMM) Models
CPR stands for Constant Prepayment Rate or Conditional Prepayment Rate. CPR expresses the prepayment percentage as an annually compounded rate. The formula for CPR follows:
SMM stands for the Single Month Mortality. SMM is the fundamental measure of prepayment speeds that other prepayment speeds are based off of. The Single Monthly Mortality measures the amount of principal repayment. SMM is the percentage of remaining mortgage principal that will be repaid each month after the scheduled principal payment has been made.
CPR and SMM can each be converted to the other using the formulas:
CPR=100-1- SMM10012 x 100
The following prepayment values are available for the CPR and SMM methods when you create amortization rules.
Code Value | Code Name |
|---|---|
CPR1 | CPR |
1 Month | |
CPR12 | CPR |
12 Month | |
CPR3 | CPR |
3 Month | |
CPR6 | CPR |
6 Month | |
CPRDEF | CPR |
Default 6% | |
CPRLIFE | CPR |
Life | |
SMM | SMM |
About the Standard Prepayment Model (PSA)
PSA refers to the Standard Prepayment Model for the Bond Market Association (previously known as the Public Securities Association). The PSA prepayment method specifies a prepayment assumption for each month in the life of the underlying mortgages, expressed as an annual basis. The Bond Market Association prepayment formula assumes that new loans make very little additional prepayments in the first 30 months of the loan (see note).
More specifically, for a 100 PSA prepayment assumption, the Bond Market Association assumes that a home owner prepays an additional 0.2% of principal in the first month of the loan, and then an additional .2% CPR for each additional month, until the 30th month of the loan. In the 31st month of the loan, PSA assumes that 100% PSA is the equivalent of 6% of the loan.
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The first 30 months of an MBS in the formula refers to the "seasoning period" on a loan. The logic behind this assumption is that new homeowners have additional expenses when purchasing a new home, and thus would not have extra funds available to apply to additional principal repayment. |
The following prepayment values are available for the PSA method when you create amortization rules.
Code Value | Code Name |
|---|---|
PSA1 | PSA |
1 Month | |
PSA12 | PSA |
12 Month | |
PSA3 | PSA |
3 Month | |
PSA6 | PSA |
6 Month | |
PSADEF | PSA |
Default 100 | |
PSALIFE | PSA |
Life |
MBS purchased at a discount with a high prepayment assumption cause a higher amortization yield than normal. This is due to the quicker repayment of principal and thus shorter life span, of the security.
Subsequently, an MBS purchased at a premium with a high prepayment assumption has a lower amortization yield. This is due to quicker repayment of principal and shorter life span of the security.
About the Effective Maturity Date (EMD)
The Effective Maturity Date is the project maturity date used in place of the final maturity for purposes of calculating amortization yield(s). Prior to the 2017 release, Eagle Accounting automatically used the effective maturity date field only for credit card securities, that is, securities with a processing security type (PST) of Factor Based Debt Instrument Credit Cards (DBFBCC). You can now additionally use the Effective Maturity with processing security type, Factor Based Debt Instrument Auto Loans (DBFBAL), Factor Based Debt Instrument (DBFBFB), Principal Only Factor Based Debt Instrument (DBFBPO), and Interest Only Factor Based Debt Instrument (DBFBIO).
When you choose a prepayment assumption of EMD, the Effective Maturity Date Method field becomes available. If you set up an amortization rule where the Amortization/Accretion Security Type is Factor Based Debt Instrument Credit Cards (DBFBCC), the panel sets the Prepayment Assumption to use Effective Maturity Date (EMD), and sets the Effective Maturity Date Method field to Soft Bullet Payment.
Code Value
Code Name
EMD