Many valuers of mortgage related assets use prepay models that are based on the prepay performance of a large variety of MBS cohorts.  One such example is the CONV 30_YR 5.00 2010 which has a consensus projected prepay speed of 250 PSA as of 8/31/24.

It must be noted that the 5.00% in this example is the pass-through/security rate.  In order to properly apply this to a mortgage or mortgage servicing asset, the 5.00% must be converted back to the underlying mortgage rate.  The difference is essentially in the service fee and guarantee fee. 

Many analysts use a constant spread of 50 basis points - but this is wrong.

As the graph above illustrates, spreads vary by product type as well as over time.  In fact, the spreads oftentimes vary from security to security.  A better alternative is to use L1A’s prepay model, which is based on the prepay performance of the underlying loans themselves.  This obviates the need for estimating the spread.

Why guess, when you could be right?