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FRM Part I · FRM Exam Part I · Mortgages and Mortgage-Backed Securities

In a prepayment model, which factor is described as 'burnout'?

Burnout is the slowing of prepayments in a pool after heavy refinancing, because the borrowers still remaining are less responsive to rate incentives. It differs from seasoning, which is the age ramp, and seasonality, which is the summer housing-turnover pattern.

  1. APrepayment speeds decline over time in a pool that has already experienced heavy refinancing, because the remaining borrowers are less rate-sensitiveCorrect
  2. BPrepayment speeds rise as the pool ages through its first 30 months
  3. CPrepayment speeds rise in summer because of housing turnover
  4. DPrepayment speeds rise when mortgage rates increase

Explanation

Burnout occurs when the most rate-sensitive borrowers have already refinanced, leaving a remainder that prepays more slowly even when incentives remain. Seasoning is the age ramp, and seasonality is the summer effect.

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