Prepayments transactions

In a pass-through transaction, the notes will normally be split into a number of classes that will be redeemed in order of priority. The actual speed at which the notes are redeemed will depend on the underlying repayment schedule of the mortgages in the pool and the rate at which the borrowers prepay their mortgages. (See Exhibit 11.8 for a generic example.)... 

Prepayments are the most important factor in determining the redemption profile of the notes in a pass-through transaction. The prepayment rate is usually measured as an annualised Conditional Prepayment Rate (CPR), which is defined as the proportion of the outstanding balance of the mortgages that is paid down ahead of schedule during the period. Exhibit 11.10 illustrates the paydown profile for the same example transaction as in Exhibit 11.9, but with an increased prepayment rate of 35% CPR. 

Flexible and offset account mortgages present a significant challenge to pass-through transaction structures. This arises because the borrowers requests to redraw previous prepayments could in aggregate exceed the principal receipts. The experiences of Australian mortgage lenders. 

The master trusts have been recording prepayment rates that are higher than on more traditional RMBS transactions. This is because the... 

The master trust transactions are largely insensitive to prepayment rates. The only requirement is that the principal receipts in the trust are sufficient for it to accumulate the bullet payments to meet the scheduled redemption dates. The principal payment rate, measured as the proportion of collateral redeemed or repurchased, has been running at an average rate of 4% per month. 

Prepayments have been more consistent across different MBS transactions than either arrears or losses (see Exhibit 11.21). Traditionally, UK nonconforming MBS transactions have been priced nsing the assumption that the prepayment speed would be at a CPR of 25%. Exhibit 11.21 shows that prepayments have generally started at a mnch slower rate but then have accelerated np to a CPR of 35% by the time the mortgages are approximately 18 months old. As a result, a 25% CPR assumption is likely to underestimate the average life of a fast-pay security but probably overestimate the average life of a longer-life security. 

Following the substitution period, the transaction typically enters the amortisation period, during which principal collected from receivables is passed through to noteholders. This may lead to a degree of variability in the average life of the security if the borrowers repay their loans more quickly or slowly than the modelled prepayment speed used to price the notes. Exhibit 14.10 shows a simplified paydown structure for the FIAT 1 transaction. 

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