What is included in the JPMorgan mortgage prepayment model?


Different mortgage prepayment models are developed by financial institutions to forecast the level of prepayment for mortgage backed securities (MBS). The JPMorgan mortgage prepayment model is a popular one for forecasting the speed of prepayment of mortgage pools with different characteristics.

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.

Some General Features of the JPMorgan Mortgage Prepayment Model

The JPMorgan ARM prepayment model is based on the idea that it is important to understand what drives consumers to sell or refinance. Here is some of what JPMorgan experts found to influence the Constant Prepayment Rate (CPR):

  • Consumers tend to refinance when it is obvious that they will save money from a new mortgage compared to the previous one;
  • Mortgage holders tend to prepay a 30-year home loan after the 15th year of the loan;
  • 30-year fixed rate loans in their last years of term have a very low CPR;
  • Home sales and refinances with cash out tend to increase when the housing market is strong;
  • Larger mortgage loans have a higher CPR than smaller ones. A higher rate environment boosts the CPR for both types, etc.
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