Glossary
Conditional Prepayment Rate (CPR)
The conditional prepayment rate (CPR) is the annualized percentage of a loan pool's outstanding principal expected to be prepaid in a year, beyond scheduled payments. It is the standard measure of prepayment speed for mortgage-backed securities and other amortizing loan pools and is derived from the monthly prepayment rate, called the single monthly mortality (SMM).
Formula
Example
A loan pool has a balance of $100,000,000 after scheduled principal payments, and borrowers prepay $1,000,000 this month, so SMM is 1%. CPR = 1 - (1 - 0.01)^12 = 1 - 0.8864 = about 11.4%. If that pace continues, roughly 11.4% of the outstanding balance would be prepaid over a year, in addition to scheduled amortization.
How it is used in underwriting
Prepayment speed changes the timing of cash flows from a loan pool, which affects the value, yield and average life of securities backed by it. Investors who buy at a premium lose value when prepayments accelerate, while those who buy at a discount benefit. Lenders and buyers of whole loan portfolios use CPR assumptions to project cash flows, price pools and estimate servicing income. Underwriters build CPR curves from historical performance of similar loans and adjust for interest rates, since falling rates usually trigger refinancing waves, as well as loan seasoning, borrower type and prepayment penalties.
CPR is an annualized rate, not a forecast that exactly that share of loans will prepay. Actual prepayment varies month to month. Commercial loans with yield maintenance or defeasance usually prepay far less than residential mortgages, so residential CPR assumptions should not be applied to them. Consumer and small business loan pools have their own patterns driven by loan term and refinancing options. In asset-backed lending and specialty finance, prepayments reduce the interest income an investor earns, so CPR assumptions directly affect projected returns. Pair CPR with CDR, the default rate, because defaulted loans also leave the pool.
Frequently asked questions
What is the difference between CPR and SMM?
SMM, single monthly mortality, is the percentage of the outstanding balance prepaid in one month. CPR annualizes that rate using compounding: CPR equals one minus one minus SMM raised to the twelfth power. A 1% SMM corresponds to roughly an 11.4% CPR.
Why does CPR matter to investors?
CPR determines how quickly principal returns to investors. Faster prepayments shorten the life of the investment and reduce total interest earned, which hurts investors who paid a premium and must reinvest at lower rates. Slower prepayments extend duration, which can hurt when rates are rising.
What is the PSA prepayment model?
The PSA benchmark is a standard prepayment curve for residential mortgages that assumes CPR rises gradually over the first 30 months of a loan's life and then levels off. Speeds are quoted as a percentage of that benchmark, such as 150% PSA, making it easier to compare prepayment assumptions across pools.
Related terms
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