What is Prepayment Burnout?
Prepayment burnout occurs when the most rate-sensitive borrowers in a pool have already refinanced, leaving behind borrowers who are less willing or able to refinance despite favorable rates. This means that sustained low rates do not produce permanently high prepayment speeds; the speed ramps up initially, then declines as the 'fast' population exits. The two-population burnout model (Schwartz & Torous) divides borrowers into fast refinancers (~30% of the pool) and slow refinancers (~70%). After the fast population has mostly prepaid, the remaining pool prepays at the slower rate even if rates remain low.
How LoanBook Uses Prepayment Burnout
LoanBook Prepay Model implements two-population burnout for residential loans. The model tracks the fraction of the fast and slow populations remaining and adjusts CPR accordingly. This is critical for pricing seasoned premium pools where burnout has already occurred.
Frequently Asked Questions
Why does burnout matter for investors?
Burnout means that a seasoned premium pool with a long history of low rates will prepay slower than a new premium pool, even at the same coupon and rate environment. This affects WAL, yield, and OAS; a burned-out pool has less prepayment risk (extension bias) than a fresh one.
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