# SCR Calculator User Manual

Version 1.15.2.0 Last modified 2024-9-9

### Mortgage Loans and Securitised Assets Modelling

**The PSA Standard Pre-Payment Model**

The PSA (Public Securities Association) Standard Prepayment Model is a mainstream model for mortgage loans. It is also used for modelling securitised assets in the SCR Calculator.

**Cashflow Modelling**

Using the PSA model to generate future monthly interest and principal payments of mortgage loans:

- At every month start, the interest payment is the interest rate times the outstanding balance.
- The scheduled principal repayment is calculated using an annuity factor for the remaining term, capped by the outstanding balance.
- If there are outstanding balance after the scheduled repayment, the unscheduled prepayment is calculated using an Constant Prepayment Rate (CPR).
- The CPR ramps up gradually with time, up to a certain point after which it stays constant.
- The model progresses until the outstanding balance becomes zero, so the final term is scenario-specific and these assets exhibit negative convexity in general.

**Floating Rate Mortgages**

For floating rate mortgage loans, their interest payments are modelled via the following procedures:

- Convert the spot curve into a forward curve (there is a tool "Spot to Forward" in Menu that can verify the workings of this function).
- Interpolate the forward curve to work out the exact rates corresponding to the asset's interest payment dates.
- Assume the forward rates realise and calculate future interest payments as [float margin] + [forward rate] for each future point in time.
- The present value is obtained by discounting with the spot curve.

**Interest Rate Capital**

For calculating interest rate capital of these assets:

- In a shocked-up scenario, the CPR will decrease; in a shocked-down scenario, the CPR will increase.
- The CPR movement affects all mortgage loans; floating-rate loans are also affected via their interest payments.
- In any case, the present value is obtained by discounting the cashflows with the corresponding spot curves.
- The difference between the base and shocked present value is the interest rate risk capital. Positive figure means a stress.

**Securitised Assets**

MBS, ABS and other securitised assets have tranched, complicated and sometimes unpredictable cashflow patterns. The SCR Calculator, with the narrow focus of calculating interest rate capital, uses the PSA model as a simplification on these assets. The only additional parameter introduced is a number of "Delay Months" at the beginning, to stop repayments from starting too early.

**Code Snippet**