What are mortgage prepayment models used for?
When mortgage loans are extended to consumers by primary lenders (banks, credit unions, private or online lenders) they are either kept in the lender’s portfolio, or sold at the secondary mortgage market. Mortgage loans are purchased by Freddie Mac, Fannie Mae, Ginnie Mae (entities with partial or full government support), or by private investors. After mortgage loans are purchased they are grouped into pools of mortgages with similar characteristics. For example, 30-year fixed rate prime first mortgages, or subprime ARMs, etc. Those pools exhibit different tendency to prepayment. The mortgage prepayment models are developed by financial institutions to forecast the likelihood of specific prepayment behavior for different pools of mortgages because prepayment rate affects the MBS rates of return. The most general factors to determine MBS prepayment rate are found to be interest rates and home appreciation/depreciation levels.
