PSA Prepayment Model

The PSA (Private Securities Federation of America) prepayment model assigns a uniform speed to pools based on their month since origination. It assumes prepayment rates start low—6% CPR in month 3—and ramp up by 6% per month until reaching 100% CPR (constant prepayment rate) at month 30, after which they stabilize. This produces the widely cited ‘100% PSA’ benchmark, which translates to a 0.5% monthly prepayment rate in month 30 (since 100% CPR ≈ 0.083 monthly). Analysts scale this curve—for example, 200% PSA doubles the rate at each month, implying faster paydown and shorter duration.

The model’s simplicity makes it ideal for communication across teams—traders, portfolio managers, and structurers refer to a pool as ‘80% PSA’ or ‘150% PSA’ rather than quoting raw CPRs. However, it’s a baseline: actual behavior can deviate, especially in non-agency or adjustable-rate deals where rate resets or balloon maturities disrupt the assumed ramp-up. In distressed environments, prepayments may stall entirely as borrowers face refinancing barriers, rendering PSA assumptions misleading without adjustment.

When modeling cash flows, PSA serves as the starting point before overlaying loan-level heterogeneity—seasoned pools may start above 100% PSA, while new origination pools may lag. Structurers test scenarios by shifting the PSA curve: stretching it (slower ramp) extends average life, while compressing it (faster ramp) shortens duration. Understanding how changes in PSA impact yield and convexity is critical for hedging, especially since tranches like PACs are only protected within specific PSA bands—outside those, they absorb significant extension or contraction risk.