Prepayment Sensitivity Index

The Prepayment Sensitivity Index reflects how current coupon MBS yields would change if pool-level prepayment speeds shifted by one basis point. It’s derived from a weekly update that runs cash flow models against actual pooled collateral data—loan vintages, interest rates, remaining terms, and seasoning—all aligned with GSE delivery standards. This allows traders and analysts to isolate the impact of speed assumptions on portfolio value, especially around refi waves or rate reset periods. It’s built for modeling duration and convexity under various macro scenarios, not just relying on static PSA inputs.

Loan packagers use the index to calibrate loan-level yield tweaks for pools close to key sensitivity thresholds. For instance, if a portfolio’s average sensitivity is high and rates are expected to hold steady, they may delay sale to avoid acceleration of principal loss in higher-coupon tranches. Conversely, rising rate expectations might trigger earlier bulk sale timing when sensitivity drops post-rate lock expiration. Back-office reconciliation teams compare model outputs from this index against actual settlement feedback to flag timing mismatches between estimated and realized cash flows.

The index is updated each Friday after GSE delivery cutoffs close, ensuring no inclusion of stale or unconfirmed loan-level data. Weekly revisions incorporate new delivery files and exclude pulled loans, adjusting for seasonal seasoning effects like Q1 prepayment slumps or summer refi spikes. This makes the index particularly reliable for long-horizon hedging—where lagging inputs could compound model drift over time. Analysts also use it to stress-test investor-level P&L statements against 5, 10, and 20 PSA shock paths.