Prepayment speeds are measured as a percentage of the PSA. For example,
if a mortgage pool has a PSA of 200% and is more than 30 months old, the
annual prepayment rate is 12% (= 6% • 2.00).
PSA percentages can be used to change the flow of funds of a pool, or issue
of CMO securities, under the terms of the original bond contract. For example,
in Table 21.1, suppose all prepayment are used to redeem bonds in Tranche 4.
However, the contract might say that if the PSA reaches or exceeds 200%, then
bonds in Tranche 3 will receive 10% of the prepayments, with only 90% of the
prepayments used to redeem bonds in Tranche 4. This means that if, after 30
months, the annual prepayment rate equals or exceeds 12%, then 10% of the
prepayments will be used to redeem ...