What Is the Public Securities Association (PSA) Model?

The Public Securities Association (PSA) Model is a prepayment benchmark developed to estimate and compare the expected principal repayment speed of U.S. mortgage-backed securities (MBS), particularly those backed by residential mortgage loans. Introduced by the Public Securities Association in 1985 (now part of the Securities Industry and Financial Markets Association, or SIFMA), the PSA model provides a standardized framework for projecting prepayment behavior over the life of a mortgage pool. It is widely used by institutional investors, analysts, and traders to evaluate cash flow risks and to price pass-through securities.

The PSA model is especially significant for securities backed by agency mortgages such as those issued by Fannie Mae, Freddie Mac, and Ginnie Mae. Because these securities pass through principal and interest payments to investors, prepayment rates — driven by borrower refinancing, relocation, or payoff — can have a major impact on the security's return and duration.

Structure of the PSA Model

The PSA model assumes a specific pattern of prepayments, expressed as a Conditional Prepayment Rate (CPR), that increases over time and then stabilizes. Under the standard 100% PSA benchmark, mortgage prepayments begin at a slow pace and ramp up during the first 30 months of the mortgage term. After that, prepayments level off at a fixed rate.

According to the 100% PSA benchmark:

• Prepayment rates start at 0.2% annualized CPR in the first month.
• CPR increases by 0.2 percentage points per month until it reaches 6% CPR at month 30.
• From month 30 onward, CPR remains constant at 6%.

This structure reflects a stylized behavior of mortgage holders: borrowers are less likely to refinance or sell their home in the early years but become more likely to prepay as time passes due to refinancing incentives, relocation, or changes in life circumstances.

PSA Multiples and Interpretations

The standard model, 100% PSA, is often scaled up or down using PSA multiples. These multiples express faster or slower prepayment scenarios relative to the baseline.

For example:

• 50% PSA assumes prepayment speeds are half the standard model: CPR ramps up to 3% at month 30, then stays at 3%.
• 200% PSA assumes double the speed: CPR reaches 12% by month 30 and remains at that level.

These multiples are essential tools for mortgage analysts and MBS investors. They allow for sensitivity analysis across different economic environments. When interest rates fall, for instance, prepayments often rise as borrowers refinance — leading investors to analyze performance at higher PSA speeds. Conversely, in rising-rate environments, lower PSA speeds may be more realistic.

Applications in MBS Analytics

The PSA model is used in various aspects of mortgage-backed securities analysis:

• Cash Flow Projections: Helps determine the timing and amount of cash flows from principal and interest, which affects present value calculations.
• Duration and Convexity: Prepayment assumptions directly influence duration, which is key to interest rate risk management.
• Relative Value Analysis: Investors compare securities by running them through scenario analyses using different PSA speeds.
• Hedging Strategies: PSA-based projections inform hedging of prepayment risk and reinvestment risk.

Traders and portfolio managers frequently incorporate PSA scenarios into pricing models and total return projections to evaluate how an MBS security behaves under different interest rate and prepayment conditions.

Limitations and Criticisms

While the PSA model is useful for standardization, it has notable limitations. It is a simplified model that does not incorporate borrower-specific or macroeconomic factors, such as credit scores, geographic location, unemployment, or housing price appreciation. As a result, real-world prepayment behavior can deviate substantially from PSA-based projections, especially during periods of economic stress or sharp interest rate movements.

In response to these limitations, more advanced models such as the Conditional Prepayment Rate (CPR) and Single Monthly Mortality (SMM) models, as well as proprietary or econometric models developed by financial institutions, are often used in conjunction with or instead of PSA projections.

Historical Context and Development

The PSA model was introduced during a period when the market for mortgage-backed securities was expanding rapidly. As MBS products became more prevalent in institutional portfolios, there was a growing need for standardized assumptions to allow investors to compare different securities and assess prepayment sensitivity. The Public Securities Association, an industry trade group at the time, created the model to promote uniformity in analysis and reporting. Over time, PSA speeds became a foundational element in mortgage market analytics, forming a common language among investors.

Although the PSA no longer exists under its original name, the model retains its designation and relevance in market practice.

The Bottom Line

The Public Securities Association (PSA) Model provides a baseline framework for modeling mortgage prepayment behavior, particularly for agency mortgage-backed securities. It simplifies the projection of prepayment rates into a standardized curve, allowing for comparability and scenario testing. While it lacks the granularity of more modern models, it remains a widely recognized benchmark for evaluating prepayment risk and structuring MBS portfolios.