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Prepayments

• Payments made in excess of scheduled mortgage principal repayments.

 
 Embedded terms in definition
 Mortgage
Principal
 
 Referenced Terms
 Amortization factor: The pool factor implied by the scheduled amortization assuming no Prepayments.

 Burnout: Is a phenomenon in the mortgage market. It represents the tendency of pools to become less sensitive to interest rate declines with the passage of time. While there may have been a surge in Prepayments due to declining interest rates, the remaining mortgages do not prepay as quickly as the previous ones in the pools. It is implied that these remaining mortgages are less vulnerable to further accelerated prepayment risks.

 Extending: Is a term to indicate an increase in the duration of mortgage backed and related securities. Generally, it is a consequence of slower-than-expected Prepayments.

 Mortgage pass through security: Also called a pass-through, a security created when one or more mortgage holders form a collection (pool) of mortgages sells shares or participation certificates in the pool. The cash flow from the collateral pool is passed through to the security holder as monthly payments of principal, interest, and Prepayments. This is the predominant type of MBS traded in the secondary market.

 Option adjusted spread model: Is an approach whereby securities are evaluated by considering the implied option characteristics. Two key variables are interest rate and prepayment rate behavior. These models incorporate the average spread of the Mortgage Backed Security or CMO tranche to the treasury yield curve. The usual reason for differences in evaluations is due to assumptions and modeling efforts for Prepayments.

 
 Related Terms
 Lag response of prepayments

<< Prepayment window Prequalification >>

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