Beyondbond Logo Advanced Solutions for Fixed Income
homeabout usproduct & servicesnewscontact
  Bond Access
  Financial Securitizer
  Repo Trader
  Financial Models
  Prepayment Model
  Default Model
  Interest Rate Model
  Analytic Tools
  Investment Management
  Education & Training
  Market Commentary
  Case Studies
  Home > Products & Services > Products > Financial Models > Prepayment Model
Prepayment Model

Model Methodology:

The Beyondbond Prepayment Model is a dynamic econometric model that applies economic theory to analyze mortgagor's prepayment behaviors and then fits them using historical US residential prepayment information. In order to develop the model, essential mortgage characteristics such as amortization term, age, contract rate, and principal factor, as well as crucial economic variables, such as housing turnover rate, prevailing market mortgage rate, and yield curve information over time were selected to determine the fixed rate prepayment factors.

For Hybrid Adjustable-Rate Mortgages (ARM), teaser, and interest only characteristics are factored into calibration. The applications of the model can be used not only for prepayment forecast but also for pricing, options adjusted spread evaluation, and scenario analysis for mortgages and mortgage-backed securities. The model specification employs cubic spline functions over a wide range of variables.

Model Factors and Economic Variables:
Refinance Yield Curve Issue Year Component
Age Housing Turnover Rate Financing Expense Component
Teaser Cash-out Issuer Agency
Seasonality Equity  
Burnout Credit  

Tuning Parameters: Refinance, Age, Burnout, Teaser, Seasonality, Equity, and Credit

Empirical Fitting:
Agency fixed-rate: 30year, 15year, and 7year Balloon
Adjustable rate mortgage (ARM): 1-month, 6-month and 1-year LIBOR-indexed
Hybrid ARM: 3/1, 5/1, 7/1, 10/1 LIBOR- and Treasury-indexed
Whole loan: High LTV, Sub-prime, and Second-lien

Model Projection

Model Documentation: Modeling Fixed Rate MBS Prepayments

Model Inputs:
  Loan Type, Term to Maturity, Gross Coupon Rate, Principal Factor, Loan Age, and Settlement Month.
Additional Inputs for ARM: teaser factor, rate cap, reset cap, reset frequency
Optional inputs: Issue Year, Finance Expense, Loan Balance, LTV, DTI, and FICO Score

Model Flexibility:

The prepayment model is used in conjunction with an in-house OAS or pricing model. Beyondbond has created an easy to use C function API for users who wish to use the prepayment model. Model delivery can be either subroutine in C library or Microsoft Excel. As well, the model is customized in a user-friendly way such that users can customize and fine-tune it via any web browser.

Customer Flexibility:
  Customer support is provided as part of your software license agreement without cost or limitation. Training is also available for technical and system implementation. Unlike most models, Beyondbond offers a solution that can be completely integrated into your existing system's structure. We provide a library of deliverable analytics to be incorporated into your trading or valuation system. Company specific development requests are often directly incorporated into the system. Updates to system information are provided to all clients on a monthly basis.

Highly trained and responsive staff
Complete user documentation
Help desk available
Rapid development response cycle
Monthly data update

*For live model projection, please Log-In or Contact Us for authorization.

Download Prepayment Model Flyer

Privacy Statement | Terms of Services | Trademarks | Sitemap © Beyondbond