Burnout, Turnover and Seasoning Effects
Two pools with identical refinancing incentive can prepay at very different speeds because one has already lived through a prior rate rally and burned off its most refinancing-prone borrowers, while the other hasn't.
Prerequisites: Prepayment S-Curves and Refinancing Incentive
A prepayment model built only on refinancing incentive treats every pool the same way at the same rate gap. Real pools don't behave that way once they've lived through a prior refinancing wave. If rates fell once, rose back up, and then fell again to the same level, the second decline usually produces noticeably slower prepayment than the first — an effect called burnout. The borrowers who could and would refinance already did so the first time; what's left in the pool is disproportionately people who, for credit, equity, or personal reasons, didn't refinance even when it made sense, and won't this time either.
Burnout means a pool's prepayment speed depends on its refinancing history, not just its current incentive. The same rate gap produces a smaller prepayment response the second time a pool has faced it, because the fastest-to-refinance borrowers have already left the pool.
The other seasoning effect: base turnover
Separately from refinancing, prepayment speed rises simply with a loan's age, independent of rates, because of ordinary turnover — people selling homes to move, divorce, downsize, or relocate for a job. A brand-new mortgage is unlikely to prepay in its first year (movers who were going to sell soon usually didn't just buy), but by year three to five, turnover-driven prepayment has ramped up to a steady background rate that persists for the life of the loan. This is the effect the PSA benchmark's 30-month ramp is built to approximate, layered underneath whatever refinancing-driven prepayment is happening on top of it.
Worked example
A pool of loans experiences a rate decline that creates a 1.5-point refinancing incentive, and speed peaks at 40% CPR as the fastest borrowers refinance out. Rates then rise for two years, incentive disappears, and speed falls back near base turnover of around 8% CPR. Rates then fall again to the same 1.5-point incentive level. A naive model using only the S-curve would again project roughly 40% CPR. A model that accounts for burnout instead recognizes that the pool has already lost most of its refinancing-prone borrowers and projects something closer to 22–25% CPR — a meaningfully slower response to an identical incentive.
What this means in practice
Prepayment desks track a pool's refinancing history, not just its current rate gap, because the same pool can respond very differently to the same incentive depending on what it has already lived through. Ignoring burnout causes models to overstate prepayment speed on any pool that has already been through a refinancing cycle, which overstates the risk to a premium bond and understates it to a discount bond.
A pool that "should" prepay fast by the S-curve alone can prepay meaningfully slower if it's burned out — mistaking a seasoned, already-refinanced pool for a fresh one is one of the most common ways a prepayment model gets pricing badly wrong on seasoned collateral.
Further reading
- Fabozzi, The Handbook of Mortgage-Backed Securities