secondarymortgage.comCPR: Conditional Prepayment Rate
Annualized percentage of a mortgage pool’s principal repaid early beyond scheduled amortization due to refinancing, home sale, or default.
CPR helps estimate how quickly principal will be returned to investors, directly affecting cash flow timing and duration risk. For example, a 100% CPR means the entire pool balance is expected to be prepaid in one year—a critical input for pricing MBS tranches. Models like PSA (Public Securities Association) benchmarks scale CPR to simulate realistic prepayment behavior under varying interest rate environments.
When evaluating MBS investments, understanding CPR is essential because higher prepayment speeds reduce effective yield and increase reinvestment risk, especially for low-coupon securities held to call dates. Investors often compare pool CPR to benchmarks like 100% PSA (roughly 6% monthly prepayment in month 30) to assess relative value and prepayment sensitivity before committing capital.
Homeowners in declining rate environments may accelerate refinancing, pushing pool CPR higher and altering expected returns. Lenders and servicers report CPR regularly to investors, and discrepancies between projected and actual CPR can signal underwriting quality issues or shifting borrower behavior. Tracking CPR trends helps investors calibrate duration expectations and adjust portfolio hedges accordingly.
