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MSCI Agency Fixed Rate Refinance Prepayment Model

categories: Americas, EMEAI, Risk Management Analytics, Factor and Risk Modeling, Investing (Investment Management), Risk Management, Asia Pacific, Asset Owners, Hedge Funds, Fixed Income, Asset Pricing and Valuation, Research Paper, Asset Managers (Quant or Fundamental), YU Yihai, general

The greatest MBS prepayment risk is driven by borrowers’ economic incentive to lower their monthly payments, i.e., to refinance their existing mortgage to lower mortgage rates. For the past 20 years, the shape of the refinance S-curve has changed numerous times due to prepayment regime shifts driven by new government policies/programs, changing underwriting standards, the housing price cycle, consumer behavior adjustments, and technology advancements. An accurately calibrated and well-behaved refinance prepayment model is critical for MBS valuation and risk management. This Model Insight details how the MSCI Fixed Rate Prepayment Model captures the complex dynamics of refinance behavior in a consistent and responsive way.


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