SCR Calculator User Manual

Mortgage Loans and Securitised Assets Modelling

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.

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.

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.

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.

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.