22.2.3 Defining Prepayment Model Method

Use this procedure to define prepayment assumptions using the Prepayment Model Calculation method. The Prepayment Model Method allows you to define more complex prepayment assumptions compared to the other Prepayment Methods. Under this method, prepayment assumptions are assigned using a custom Prepayment Model. You can build a Prepayment model using a combination of up to three Prepayment Drivers and define Prepayment Rates for various values of these drivers. Each driver maps to an attribute of the underlying transaction (age/term or rate) so that the Cash Flow Engine can apply a different Prepayment Rate based on the specific characteristics of the record.

Note:

All Prepayment Rates should be input as annual rate.

Prerequisites

  • Prepayment Model must be created.
  • Performing basic steps for creating or updating a Prepayment Rule.

Procedure

Users also have two options for determining the timing of the Prepayment Model assumption. The options include:

  1. Define the source for the Market Rate by Selecting an Index (Interest Rate Code) from the list of values.
  2. Enter the Spread. The spread is added to the rate from the underlying interest rate curve to determine the market rate.
  3. Select an Associated Term: Remaining Term, Reprice Frequency, or Original Term.
  4. Specify the Prepayment Model parameters.
    • Enter the Coefficient (if needed) by which the Prepayment Rate should be multiplied. This multiple is applied to the instruments for which the origination date lies in the range defined in the Start Origination Date-End Origination Date fields.
    • Select the Start Origination Date using the date picker. Alternatively, you can enter the Start Origination Date in the space provided.
    • Select a predefined prepayment model from the Prepayment model Rule list of values. Click the View Details icon to preview the selected Prepayment Model.
    • The system uses the prepayment model assumptions to calculate the prepayment amounts for each period. You need to associate a prepayment model for every Start Origination-End Origination Date range.
    • Click Add Another Row to add additional rows and click the corresponding Delete to delete a row.

      You can add as many rows in this model as you require. However, you need to enter relevant parameters for each new row. You can also use the Excel import/export feature to add the Prepayment rate information.

  5. Define Seasonality assumptions as required to model date specific adjustments to the annual prepayment rate. Inputs act as multiplier, for example, an input of 2 will double the prepayment rate in the indicated month