How does the PSA prepayment model work and why is 100 PSA the benchmark?

Question

AcadiFi · Accepted Answer

The Public Securities Association (PSA) model translates prepayment expectations into a standardized Conditional Prepayment Rate (CPR) curve. 100 PSA means:

- CPR starts at 0.2% in month 1.
- CPR ramps up by 0.2% per month for the first 30 months.
- CPR plateaus at 6.0% from month 30 onward.

So at 100 PSA, a freshly originated pool has almost no prepayments in month 1, then climbs linearly, then settles at 6% annualized forever.

Multiples scale the ramp and the plateau proportionally. At 165 PSA (a common fast-pay assumption), month-12 CPR = 1.65 × (12 × 0.2%) = 3.96%, and the plateau becomes 1.65 × 6% = 9.9%. At 50 PSA (slow), plateau CPR is just 3%.

To convert CPR to the monthly prepayment rate (SMM): SMM = 1 − (1 − CPR)^(1/12). At plateau 100 PSA, SMM ≈ 0.514%, meaning about half a percent of remaining balance prepays each month.

Why the benchmark? The PSA numbers were calibrated to the historical average of seasoned 30-year FHA loans from the 1980s. Today we quote actual prepayment speeds relative to this anchor — a pool printing at 200 PSA is refinancing twice as fast as the old baseline.

The model is a convention, not a forecast; modern OAS models use loan-level econometric prepay functions instead.

How does the PSA prepayment model work and why is 100 PSA the benchmark?

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