Finding Mortgage Pricing Models with Default and Prepayment
Summary
The document asks for a source that explains mortgage valuation as a function of default and prepayment assumptions, including standard measures such as PSA and SMM. It is aimed at a student who wants to explain how these assumptions affect mortgage pricing, particularly for mortgage-backed securities. The replies point readers toward dedicated MBS references and related study materials.
One recommendation identifies a text whose coverage includes prepayment and default behavior, the 100 PSA benchmark, and pricing from default and prepayment curves. Other replies broadly suggest MBS or financial risk management texts, but offer little detail about a specific valuation derivation. The document therefore serves mainly as a reading guide rather than a self-contained pricing method. It does not present a formula, worked example, model assumptions, or evidence comparing approaches, so readers would need to consult the recommended material for the actual mechanics and limitations.
Key ideas
- Mortgage value can be studied as a function of default and prepayment assumptions.
- PSA and SMM are cited as relevant prepayment measures.
- A recommended MBS reference covers default and prepayment metrics and curve-based pricing.
- The replies offer sources rather than a valuation formula or worked analysis.
- The document does not compare modeling assumptions or explain model limitations.
Tags
Full text
# reference for elementary mortgage math # reference for elementary mortgage math I have a student doing a project on default rate & prepayment rate for mortgages. She would like to include a section on how the quantities affect pricing, & so would like to reference a formula that gives the value of a mortgage in terms of them, say for constant values of them. I think it used to be possible to find them in one or both of Fabozzi's books, (fixed income handbook and mortgage handbook) but the editions she found in the library did not in fact have them. So the QUESTION is does someone know a readily available source that has a formula for the value of a mortgage in terms of these quantities or basically the same thing, psa, smm etc. ## Answer by oliversm (score 1) https://quant.stackexchange.com/a/27893 I would recommend the following text: - Mortgage-Backed Securities: Products, Structuring, and Analytical Techniques, 2nd Edition - Frank Fabozzi. Part II: Prepayment and Default Metrics and Behavior covers the topics you mentioned, and I have been using it recently as a basis for making models based on agency MBS products. This introduces the 100 PSA model, and general pricing using default and prepayment curves. ## Answer by kris123456 (score 0) https://quant.stackexchange.com/a/21549 The best book i can think of are from FRM Quant program. The concepts for which you are seeking answers could be easily found in FRM part 1 books (Initial chapters). These are pretty expensive, but if you could get your hands on any older versions, that should be fine. Any MBS book would have these topics. But the reader must have keen intent to extract the information. All Interest rates and MBS primarily depend on few formula "KE to the power of RT" and "P(1 + r/n)to the power of n*t". Most formula's are based on the above two. These could be slightly tweaked to customize as per requirements to include constant costs, recurring costs and any special costs. ## Answer by Larasing (score 0) https://quant.stackexchange.com/a/24664 https://www.youtube.com/watch?v=aEnjFFFVhGs Credit goes to the CFA institute.
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