Single Monthly Mortality (SMM)
What Is Single Monthly Mortality?
Single month to month mortality (SMM) is a measure of the prepayment rate of a mortgage-backed security (MBS). As the term proposes, the single month to month mortality measures prepayment in a given month and is communicated as a percentage.
For investors of mortgage-backed securities, prepayment of mortgages is generally unwanted since future interest is inescapable; investors favor a lower or declining single month to month mortality on a MBS.
Figuring out Single Monthly Mortality (SMM)
Single month to month mortality is now and again mistook for the scheduled principal prepayments. The servicer records for a MBS normally give the scheduled principal repayments that are set for the pool when the MBS is made.
Single month to month mortality alludes to the principal prepayments that happen over that amount, basically taking the total principal paid, deducting the scheduled principal payments, and isolating by the outstanding balance that was scheduled for the month (rather than the genuine) to get a percentage of prepayment.
Single Monthly Mortality and Prepayment Risk
The single month to month mortality will vary from one month to another as per borrower refinancing, accelerated payments, etc. Prepayment ruins the returns for MBS investors since mortgages are typically prepaid utilizing a refinancing loan, and this happens basically when interest rates have fallen. So while an investor in a MBS accepts they have locked in a higher yielding investment in a low rate environment, they may, truth be told, have the floor covering pulled free from them.
Subsequently, investors in mortgage-backed securities are constantly concerned about the prepayment risk on their investment, and single month to month mortality gives them a measurement to show whether risks are going up, going down, or evening out off.
SMM, Constant Prepayment Rate, and Prepayment Ramps
Single month to month mortality can be annualized into the constant prepayment rate (CPR), which gives the annual percentage instead of a month to month snapshot. MBS investors can switch between the two during important points in their holding's life span. For instance, on the off chance that interest rates decline throughout some stretch of time, a MBS investor will for the most part watch the SMM to see whether burnout is setting in.
Essentially, there are the initial 30 months of a mortgage-backed security's life where it is thought of "on the slope" and during which SMM and CPR are expected to increase before evening out off once the MBS is "off the incline" following 30 months. The caveat with the prepayment slopes is that they depend on the public securities association (PSA) model from the 1980s. Albeit the broad layout of this model holds up — predominantly that there are two phases to a MBS lifespan — the mortgage market is a better place now, and public awareness of refinancing and interest rates is more omnipresent than when the PSA model was made. The length of the inclines is accepted to be a lot more limited currently, as individuals are bound to refinance when rates go down and lock it for quite a long time or some random period whose regularly scheduled payments they can manage. This awareness can be raised additionally concerning adjustable-rate mortgages (ARMs) lower prevalence after the great recession of 2008 brought about by subprime mortgages and what was named toxic MBS tranches.
Features
- SMM is measured as an every month percentage of mortgages in the MBS pool that will be paid off right on time.
- Prepayment risk influences the duration of a MBS and is a primary concern of asset-backed investors.
- Single month to month mortality (SMM) is a method for checking the prepayment risk of a mortgage-backed security.
